BOARD PROCEEDINGS

In order to ensure effective control of the Group, the Board reserves certain matters for decision to itself. These include:

• long-term objectives and strategy;
• business plans and budgets;
• internal control arrangements;
• announcement of results and approval of annual report and accounts;
• dividend policy;
• Board committees and their terms of reference;
• major capital expenditure;
• significant Group policies; and
• acquisitions and divestments.

The Board manages these matters at its regular Board meetings and strategy days. Briefing papers are provided to directors several days in advance of meetings. Each meeting reviews financial and business performance against the budget and plans approved by the Board. It also receives reports and presentations from the businesses and minutes and/or oral reports of Board Committee meetings. This ensures that all directors are aware of, and are in a position to monitor effectively, the Group’s operations and current issues. Other specific business, which needs to be addressed between scheduled Board meetings, is dealt with at special Board meetings, often by conference telephone. The Chairman meets the non-executive directors informally, without executive directors being present, at least once during the year. These meetings and other regular informal discussions create the opportunity for valuable input from the non-executive directors.

To ensure that its broad range of responsibilities is managed effectively and in an appropriate manner, the Board has established a number of Committees. These are the Executive Committee, Remuneration Committee, Audit Committee and Nomination Committee.

Executive Committee

The Group Chief Executive is responsible for leading, managing and controlling the Company and its subsidiaries, subject to those matters reserved for decision by the Board. He chairs the Executive Committee, which is authorised, subject to the powers delegated to it and subject to reporting its significant decisions to the next Board meeting, to take whatever management action it considers necessary to safeguard the interests of the Company and to further the strategy, business objectives and targets established by the Board. During the year, the Executive Committee comprised the three executive directors, Ian Thom, Company Secretary and Laurence MacKenzie, Managing Director of T&D and Powerteam. There were 10 scheduled meetings and a number of additional meetings to consider specific issues. The Chairman may attend these meetings at his discretion. The key responsibilities and tasks delegated to the Committee include:

implementing Board policy;
ensuring effective performance and co-ordination of the Group’s business activities;
overseeing financial and operational performance, including health and safety and
environmental performance;
monitoring and implementing improvements in financial performance;
approving expenditure and other financial commitments as delegated by the Board;
considering major changes in organisational structure; and
approving appointments to boards of subsidiary companies.

Remuneration Committee

During the year the Remuneration Committee comprised Duncan Lewis (Chairman), Mike Toms, Dipesh Shah and Desmond Smyth (until his retirement in February 2005). On his appointment as Chairman on 1 May 2005, Dipesh Shah stood down from the Committee.The Committee’s function is to determine remuneration policy and specific remuneration packages for executive directors, the Chairman and the Company Secretary, including, where appropriate, pension arrangements and service contracts, and recommending and monitoring the level and structure of remuneration for senior management. The Committee consults with the Group Chief Executive on aspects of the other executive directors’ and the Company Secretary’s remuneration.

Nomination Committee

During the year the Nomination Committee comprised Philip Rogerson (Chairman), Duncan Lewis, Dipesh Shah, Desmond Smyth (until his retirement in February 2005), Mike Toms and Patrick Haren. It has a remit to:

• consider and make recommendations to the Board on all new appointments of directors having regard to the overall balance and composition of the Board;
• consider succession planning; and
• make recommendations to the Board concerning the re-appointment of any non-executive director following conclusion of his or her specified term of office.

During the year the Committee, led by the Senior Independent Director, recommended to the Board the appointment of Dipesh Shah as Chairman, following the announcement of Philip Rogerson’s retirement. As a result of its deliberations the Committee considered that Dipesh possessed the qualities required to fulfil the role of Chairman of the Board and was delighted when Dipesh agreed to the appointment. Given the recentness of his appointment as a non-executive director, the Committee did not consider it necessary to re-engage executive search consultants for that appointment. Dipesh Shah abstained from the Nomination Committee’s recommendation to the Board on his appointment as Chairman.

During the year a description of the role and capabilities for the appointment of a new non-executive director was prepared and the Committee appointed executive search consultants to identify and propose candidates with a view to maintaining the balance of skills and abilities on the Board and to provide an opportunity to enhance membership of the Board’s committees. It is anticipated that the Committee will recommend the appointment of a new non-executive director during the financial year 2005/06.

Audit Committee

During the year the Audit Committee comprised Desmond Smyth (a chartered accountant, and Managing Director of Ulster Television plc until 1999, who had chaired the Committee continually from 1996 to his retirement in February 2005), Duncan Lewis, Dipesh Shah and Mike Toms. Mike Toms has chaired the Committee since 1 March 2005. On his appointment as Chairman of the Board, on 1 May 2005, Dipesh Shah stood down from the Committee. The Board is satisfied that at least one member of the Committee has recent and relevant financial experience.

The external auditors (Ernst and Young LLP), the internal auditors (PricewaterhouseCoopers LLP), the Chairman, the Group Finance Director and other executive directors may attend meetings at the invitation of the Committee. The Committee’s remit is to:

• monitor the integrity of the financial statements and any formal announcements relating to the Group’s financial performance;
• review significant financial reporting issues and judgements which they contain;
• review accounting policies;
• monitor and review the effectiveness of internal controls and the Group’s risk management system;
• monitor and review the effectiveness of the internal audit function;
• oversee the relationship with the external auditors; and
• make recommendations on these matters to the Board for decision.

During the year, each meeting of the Committee received a report from the Risk Management Committee covering its review of business risk registers and steps taken to enhance further the risk management framework within the Group. The internal auditors provide each meeting of the Committee with a report covering risk assurance and updates on work carried out under the internal audit plan. The external auditors provide the Committee with reports on the accounts of the Company and its subsidiaries. During the year, the Committee considered progress reports from the project team on the planned implementation of IFRS.

The Committee makes recommendations to the Board on the appointment of internal and external auditors and their remuneration and determines their terms of engagement. The Committee has carried out an assessment of the external auditors’ independence and objectivity and the effectiveness of the external audit process, taking into consideration relevant UK professional and regulatory requirements and in line with the guidance set out in the Smith Guidance on Audit Committees. The results of the assessment were reported to the Board. A policy is in place on the employment of former employees of the external auditors.

The Board’s policy on the supply of non-audit services by the external auditors specifies areas of non-audit work that can be carried out by the external auditors and the financial thresholds above which non-audit work requires the approval of the Board. Any individual fees in relation to non-audit services in excess of 50% of the annual audit fee and/or any excess of the aggregate fees for non-audit services above 100% of the annual audit fee require Board approval. Within these parameters, where it is generally considered reasonable that the external auditors undertake non-audit services for sound commercial and practical reasons without inhibiting their objectivity, then engagement is permitted. Such services include independent certification, reporting for Stock Exchange purposes and taxation. Much of the non-audit cost during 2004/05 was associated with planning for the introduction of IFRS and ongoing taxation services. During the year the Board gave approval for the external auditors to provide taxation and assurance services in relation to the disposal of Sx3. Involvement by the external auditors in these areas was considered appropriate and in the best commercial interests of the Group.

During the year the Committee reviewed the Group’s “whistleblowing” arrangements, whereby employees may raise concerns about possible improprieties in financial reporting and other matters and have them investigated.

The terms of reference of the Nomination, Remuneration and Audit Committees are available below:

• Nomination Committee Terms of Reference
• Remuneration Committee Terms of Reference
• Audit Committee Terms of Reference

BOARD PERFORMANCE EVALUATION

The Board has established a formal process to evaluate its own performance annually. This process was first undertaken in the autumn of 2004 and conducted by the Company Secretary. Each Board member and the Company Secretary completed a questionnaire on the effectiveness of the Board and the Chairman. In addition, Board Committee members completed a questionnaire on each Committee’s performance. The Senior Independent Director also met separately with the non-executive directors, taking into account the views of the executive directors, to discuss the performance of the Chairman. Based on the responses to the questionnaire and these meetings, a report was considered by the Board, and individual Committees as appropriate, and the specific actions identified have been implemented to ensure continuous improvement in Board performance.

COMMUNICATIONS WITH SHAREHOLDERS

The Group Chief Executive and the Group Finance Director have regular meetings with institutional investors, fund managers and analysts. The Chairman introduces the presentation of the Company’s interim and preliminary results to analysts and investors and also meets with major shareholders from time to time. In addition, the Chairman has advised major shareholders, in writing, of his availability (along with that of the Senior Independent Director and newly appointed non-executive directors) should there be issues which the shareholders may wish to discuss. The Chairman of the Remuneration Committee consulted with major shareholders on proposed changes to executive directors’ remuneration policy.

To ensure that the Board is informed of shareholder views it receives regular feedback reports from analysts and major shareholders, assimilated by the Company’s brokers and financial PR consultants, in particular following presentations and meetings on the publication of financial results. Analysts’ notes are provided to the Board on a regular basis.

The principal method of communicating with the majority of shareholders is via the Annual Report and Accounts or Annual Review and Summary Financial Statement and the Company’s website which contains details of financial presentations to major shareholders and other information about the Group. All shareholders have the opportunity to attend the AGM. All directors were present at the 2004 AGM and all intend to be present at the 2005 AGM to answer shareholders’ questions.

INTERNAL CONTROL

Turnbull Compliance

The Board has fully implemented the Turnbull Guidance “Internal Control: Guidance for Directors on the Combined Code”.

The Board is responsible for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board’s monitoring of controls covers a wide range including financial, operational and compliance controls together with risk management.

There is an ongoing process for identifying, evaluating and managing the Group's significant risks. This process has been in place for the year ended 31 March 2005 and up to the date of approval of the Annual Report and Accounts, accords with the Turnbull Guidance “Internal Control: Guidance for Directors on the Combined Code” and is regularly reviewed by the Board.

During the year, work has continued through the internal control and risk management process to deal with areas of improvement which come to management’s and the Board’s attention. Businesses are required to maintain risk registers and review them on a regular basis.

Risk Management

The Group’s strategy is to follow an appropriate risk policy, which effectively manages exposures related to the achievement of business objectives. The Risk Management Committee, chaired by the Group Finance Director, comprises a number of senior managers from across the Group and meets monthly to assist the Board in fulfilling its risk management and control responsibilities. The Committee reviews the level of exposure to individual risks and its acceptability within the policy on risk. It reports to the Audit Committee, the Executive Committee and the Board on a regular basis. It reviews the risk management process and ensures appropriate communication between the Board, Audit Committee, Executive Committee, internal audit and those with responsibility for risk management issues within the businesses. Each business has nominated a risk manager to ensure that the risk management and internal control systems are regularly reviewed, updated and embedded into business processes. The Committee regularly reviews individual business risk registers as well as registers covering a number of cross functional areas including group finance, treasury, regulatory affairs, procurement and information technology. Business continuity and disaster recovery arrangements are reviewed annually by the Committee.

The Risk Management Committee has responsibility for monitoring that businesses comply with the Group’s Corporate Social Responsibility (CSR) obligations. The Committee reviews the businesses’ CSR strategy and programmes. During the year, social, ethical and environmental (SEE) risks were incorporated into each business risk register.

Risk issues are also addressed at management meetings through the review of risk registers. These meetings consider early warning signs of risks materialising and significant control failings or weaknesses.

The Executive Committee and the Board specifically consider the corporate risk register which sets out those risks which are managed at a corporate level and/or the management of which is determined by policy set at a corporate level.

Internal Audit

The Group’s emphasis on sound management structures and policies and procedures is backed up by operational and financial review mechanisms and an externally resourced internal audit function, provided by PricewaterhouseCoopers LLP. During the year, the internal auditors have carried out a programme of audits and a review of the risk management process. The internal auditors report to the Executive Committee each month and results of the audits are reported to management and the Audit Committee. The internal auditors carry out follow-up reviews to determine the extent of implementation of actions that have been agreed by management. The annual internal audit and risk assurance programme and significant internal audit findings are reviewed by the Audit Committee, as are any relevant reports prepared by the external auditors.

Annual Assessment

The Board has carried out its annual review of effectiveness of the system of internal control. In carrying out this review it considered a number of key reports. The Executive Committee reports to the Board on its assessment of current significant risks. A report from the Risk Management Committee verified that each executive director and senior manager had completed and signed a letter of representation confirming his or her responsibility in relation to internal control and the completeness and accuracy of his or her risk register and risk reporting, disclosing any known material failings or weaknesses in internal controls. Reports were also considered from the Chairman of the Audit Committee on risk management issues discussed during the year and from the internal auditors on the risk management process.

The Board regards the development of the system of internal control as an ongoing process and continues to review and develop the internal control systems of the Group.