The Group has applied the main principles set out in the UK Corporate Governance Code (“Code”). A full statement of compliance with the Code’s main principles of the Code of Best Practice is on pages 21 to 22 of the 2014 Annual Report.

The Company has complied with the Code throughout the year ended 31 December 2014, other than the exception stated as follows:

A.2.1 – Chairman and Chief Executive – The Corporate Governance Code requires that the roles of Chairman and Chief Executive should not be exercised by the same individual. Mr Ratcliffe was re-appointed to the role of Executive Chairman on 29 October 2013. The Board considers that the combined role is in the interest of shareholders due to the Group’s operating businesses being managed by the Managing Directors and associated management teams of each business with the Group roles providing a holding company function, including corporate governance, corporate/strategic direction and operational oversight. The Board will maintain a majority of independent non-executive directors ensuring continued robust corporate governance.

Board of Directors

The Board of Directors meets regularly to review strategic, operational and financial matters, including proposed acquisitions and divestments, and has a formal schedule of matters reserved to it for decision. It approves the interim and preliminary financial statements, the annual financial plan, significant contracts and capital investment in addition to reviewing the effectiveness of the internal control systems and business risks faced by the Group. Where appropriate, it has delegated authority to committees of directors. Information is supplied to the Board in advance of meetings and the Chairman ensures that all directors are properly briefed on the matters being discussed. The Board Meetings are also attended by the Managing Directors of each of the operating businesses who provide detailed presentations and updates on the performance of their business.

The Chairman is primarily responsible for management of the Board, corporate strategy and development and ensuring effective communication with shareholders. The Managing Directors of each operating business are responsible for managing their respective businesses.

Non-executive directors are appointed for specified terms, up to a maximum of three years, and reappointment is not automatic. There is a formal selection process to appoint non-executive directors and a separate Nomination Committee was formed in 2001. Mr Bertram is the senior independent non-executive director. The Board considers that all of the non-executive directors are independent in character and judgement from the management of the Company and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. All of the non-executive directors have extensive business experience.

All directors have access to the advice and services of the Company Secretary or a suitably qualified alternative, and all the directors are able to take independent professional advice, if necessary, at the Company’s expense. Directors offer themselves for re-election at the Annual General Meeting following their appointment by the Board and thereafter in accordance with the Company’s current Articles of Association which requires directors to retire from office and offer themselves for reappointment by the members if they were not appointed or reappointed at one of the preceding two Annual General Meetings.

Board Committees

Each of Mr Bertram, Ms Murray and Mr Whiting serve on the Nomination, Remuneration and Audit Committees and Mr Ratcliffe serves on the Nomination Committee. The Committees have written terms of reference which clearly specify their authority and duties and those terms of reference are available upon written request to the Company.

Nomination Committee

Mr Ratcliffe is chairman of the Nomination Committee which also comprises Mr Bertram, Ms Murray and Mr Whiting. The Nomination Committee meets at least once a year and recommends to the Board candidates for appointment as directors and reappointment.

The Board and the Board Committees recognise the importance of promoting all aspects of diversity, including gender, throughout the Group. When making an appointment to the Board, candidates are chosen against criteria, specified by the Nomination Committee in 2011, such as balance of skills, business experience, independence, qualifications, knowledge, diversity and other factors relevant to the Board operating effectively. Successful candidates are chosen on merit against these criteria, regardless of race, gender or religious beliefs.

Remuneration Committee

Ms Murray is chair of the Remuneration Committee and the Committee also comprises Mr Bertram and Mr Whiting.

Audit Committee

Mr Bertram, a Fellow of the Institute of Chartered Accountants in England and Wales, is chairman of the Audit Committee and the Committee also comprises Ms Murray and Mr Whiting. The Audit Committee monitors the integrity of the financial statements of the Company and meets regularly with management and the external auditors to review and monitor the financial reporting process, the statutory audit of the consolidated financial statements, audit procedures, internal controls and financial matters.

The external auditors present in advance of the year end its approach to the forthcoming audit together with its findings from the audit following the completion of its work. The Audit Committee assesses the performance of the external auditors on an annual basis and based on this review the Audit Committee recommends the appointment, reappointment or removal of the Company’s external auditors to the Board. This review resulted in the Audit Committee determining to retain PricewaterhouseCoopers LLP as auditors for the Group’s 2014 financial statements.

The Chairman and Group Finance Director attend the Audit Committee meetings by invitation, however, the Audit Committee meets at least annually with the Company’s external auditors without the other directors present. The external auditors have unrestricted access to the Audit Committee.

The Audit Committee considers that, in some circumstances, the external auditors’ understanding of the business can be beneficial in improving the efficiency and effectiveness of advisory work and, therefore, it has been considered appropriate that the external auditors be engaged for non-audit services related to financial and tax matters. The Audit Committee has reviewed the nature of the work and level of fees for non-audit services and considers that this has not affected the auditors’ objectivity and independence.

The Audit Committee reports to the Board on how it has discharged its responsibilities. This includes identifying the significant issues that it has considered in relation to the financial statements and how these issues were addressed, its assessment of the effectiveness of the external audit process and its recommendation on the reappointment of the Company’s external auditors together with any other issues on which the Board has asked the Audit Committee’s opinion.

The significant judgements considered by the Audit Committee were:

Revenue Recognition

A key area of judgement in respect of recognising revenue is the timing of recognition where management assumptions and estimates are necessary. The Audit Committee were provided with an overview of significant balances, together with the movement on those balances since the previous year end. In addition, the Audit Committee receives an overview of significant contracts entered into during the course of the year which provides the opportunity to discuss the impact of contractual terms on revenue recognition. External audit performed detailed audit procedures on revenue recognition and reported their findings to the Audit Committee. The Audit Committee concluded that the timing of recognition continues to be in line with the Group’s accounting policy on revenue recognition.

Annual Goodwill Impairment Review

Goodwill is a material asset on the Group’s balance sheet and it is the Group’s policy to annually test the asset for impairment. The judgements in relation to goodwill impairment testing relate to the assumptions applied in calculating the value in use of the operating businesses. The key assumptions applied in the calculation relate to the future performance expectations of the businesses. Plans prepared by senior management supporting the future performance expectations used in the calculation were reviewed and approved by the Board. The Audit Committee received a presentation on the outcome of the impairment review performed by senior management. The impairment review was also an area of focus for the external auditor, who reported their findings to the Audit Committee. The Audit Committee concluded that there was no requirement to impair the carrying value of goodwill at the year end.

Tax

The operating businesses operate in a number of territories which increases the complexity of the Group’s tax affairs.

A presentation was prepared by senior management for the Board and Audit Committee to consider. The presentation provided an overview of the Group’s tax affairs together with the proposed accounting treatment of any judgemental items. Tax matters were also an area of focus for the external auditor, who reported their findings to the Audit Committee.

The Audit Committee concluded that they were satisfied with the accounting treatment.

Board Attendance

Details of the number of meetings of the Board (including sub-committees at which only certain directors are required to attend) and committees and individual attendances by directors are set out in the table below.

Board
Meetings
Audit
Committee
Remuneration
Committee
Nomination
Committee
Number of Meetings
held in 2014
11 4 6 1
M R Ratcliffe 11 4* 6* 1
P B Wood 11 4* 6* 1*
P Bertram 10 4 5 0
V Murray 11 4 6 1
P Whiting 11 4 6 1
* attendance by invitation.

The above table details attendance at scheduled meetings. In addition 8 ad hoc meetings were held, of these meetings, 4 meetings were held by a sub- committee relating to the exercise of share options.

Management Meetings of the Operating Businesses

Each of the Group’s two operating businesses hold management meetings on a monthly basis chaired by the Managing Director responsible for that business. The Chairman and Group Finance Director regularly attend these meetings and all Non-Executive Directors are invited to attend these meetings.

Relations with Shareholders

In order to maintain dialogue with institutional shareholders the Chairman and Group Finance Director meet with them following interim and final results announcements, or as appropriate, with other directors available to meet institutional shareholders on request. Where practicable the Annual Report is sent to shareholders at least 20 working days before the Annual General Meeting and each issue for consideration at the Annual General Meeting is proposed as a separate resolution. All continuing directors generally attend the Annual General Meeting.

Capital Structure

The information required pursuant to the Disclosure and Transparency Rules is detailed on page 13 of the 2014 Annual Report.

Social, Ethical and Environmental Risks

The Board takes regular account of the significance of social, environmental and ethical (“SEE”) matters to the Group’s business of providing IT services and solutions (including software, managed services and consultancy) to the business community.

The Board considers that it has received adequate information to enable it to assess any significant risks to the Company’s short-term and long-term value arising from SEE matters and has concluded that the risks associated with SEE matters are minimal. The Board will continue to monitor those risks on an ongoing basis and will implement appropriate policies and procedures if those risks become significant.

Internal Control

The Group maintains an ongoing process in respect of internal control to safeguard shareholders’ investments and the Group’s assets and to facilitate the effective and efficient operation of the Group.

These processes enable the Group to respond appropriately, and in a timely fashion, to significant business, operational, financial, compliance and other risks, (in accordance with the Code), which may otherwise prevent the achievement of the Group’s objectives.

The Group recognises that it operates in a competitive market that can be affected by factors and events outside its control. Details of the major risks identified by the Group are set out in the table on pages 9 and 10 of the 2014 Annual Report. The Group is committed to mitigating risks arising wherever possible and accepts that internal controls, rigorously applied and monitored, are an essential tool in achieving this objective.

The key elements of Group internal control, which have been effective during 2014 and up to the date of approval of these financial statements, are set out below:

  • The existence of a clear organisational structure with defined lines of responsibility and delegation of authority from the Board to its executive directors and operating divisions;
  • A procedure for the regular review of reporting business issues and risks by the operating businesses;
  • Regular review meetings with the operating management;
  • A planning and management reporting system operated by each operating business and the executive directors; and
  • The establishment of prudent operating and financial policies.

The directors have overall responsibility for establishing financial and other reporting procedures to provide them with a reasonable basis on which to make proper judgements as to the financial position and prospects of the Group, and have responsibility for establishing the Group’s system of internal control and for monitoring its effectiveness.

The Group’s systems are designed to provide directors with reasonable assurance that physical and financial assets are safeguarded, transactions are authorised and properly recorded and material errors and irregularities are either prevented or detected with the minimum delay. However, systems of internal financial control can provide only reasonable and not absolute assurance against material misstatement or loss.

The key features of the systems of internal financial control include:

  • Financial planning process with an annual financial plan approved by the Board. The plan is regularly updated providing an updated forecast for the year;
  • Monthly comparison of actual results against plan;
  • Written procedures detailing operational and financial internal control policies which are reviewed on a regular basis;
  • Regular reporting to the Board on treasury and legal matters;
  • Defined investment control guidelines and procedures; and
  • Periodic reviews by the Audit Committee of the Group’s systems and procedures.

The majority of the Group’s financial and management information is processed and stored on computer systems. The Group is dependent on systems that require sophisticated computer networks. The Group has established controls and procedures over the security of data held on such systems, including business continuity arrangements.

On behalf of the Board, the Audit Committee has reviewed the operation and effectiveness of this framework of internal control for the year ended 31 December 2014, and up to the date of approval of the Annual Report.

Internal Audit

The need for an internal audit function is reviewed on an annual basis by the Audit Committee taking into account the size and complexity of the Group. At present there is no intention to establish an internal audit function.

Management Meetings of the Operating Businesses

 

COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE
Code of Best Practice – Principles Microgen Compliance Statement
A LEADERSHIP
1 The Role of the Board
Every company should be headed by an effective board, which is collectively responsible for the success of the company.
The directors’ responsibilities are outlined in the Report of the Directors. The Board meets regularly on a formal basis plus additional ad hoc meetings as necessary.
2 Division of Responsibilities
There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.
Mr Ratcliffe was appointed Executive Chairman on 29 October 2013. The Board retains a majority of non-executive directors ensuring continued robust corporate governance. Each operating business is the responsibility of an executive who is invited to attend Board meetings.
3 The Chairman
The Chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
The Chairman is responsible for setting the Board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. He promotes a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors. In addition, he ensures that the directors receive accurate, timely and clear information.
4 Non-Executive Directors
As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.
The Board appoints one of the independent non-executive directors to be the senior independent non-executive director to provide a sounding board for the Chairman and to serve as an intermediary for the other directors if necessary. The senior independent non-executive director is available to shareholders if they have concerns which contact through the normal channels of Chairman or Group Finance Director fails to resolve or for which such contact is inappropriate. The Chairman holds meetings with the non-executive directors without the executives being present. Led by the senior independent non-executive director, the non-executive directors meet without the Chairman at least annually to appraise the Chairman’s performance and on such other occasions as are deemed appropriate.If the directors have concerns which cannot be resolved about the running of the company or a proposed action, it is Company policy that their concerns must be recorded in the Board minutes. On their resignation, a non-executive director has to provide a written statement to the Chairman, for circulation to the Board, if they have any such concerns.
B EFFECTIVENESS
1 The Composition of the Board
The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
The Board consists of the Chairman and Group Finance Director plus a majority of non-executive directors. All of the non-executive directors (including those detailed in the Statement of Compliance) are considered by the Board to be independent of the management of the Company and free from any business or other relationship which could materially interfere with the exercise of their independent judgement.
2 Appointments to the Board
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
A separate Nomination Committee, comprising of all the non-executive directors together with the Chairman, is responsible for identifying and nominating candidates to fill Board vacancies.
3 Commitment
All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.
The Chairman’s other significant commitments are disclosed in the Annual Report. Any changes to such commitments are reported to the Board as they arise and their impact explained in the next Annual Report. Other executive directors will not be given permission by the Board to take on more than one directorship in a company nor chairman of such a company.The terms and conditions of appointment of non-executive directors are made available for inspection. The letter of appointment sets out the expected time commitment. The appointed non-executive directors have undertaken that they will have sufficient time to meet what is expected of them.
4 Development
All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
The Chairman ensures that new directors receive an induction on joining the Board. Any training needs required by the directors will be discussed with the Chairman.
5 Information and Support
The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.
The Board is supplied with management accounts and operational reviews prior to each meeting. All non-executive directors have extensive business experience and possess relevant and updated skills and knowledge to perform their duties.The Board ensures that directors, especially non-executive directors, have access to independent professional advice at the Company’s expense where they judge it necessary to discharge their responsibility as directors. All directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. The appointment and removal of the Company Secretary is a matter for the Board as a whole.
6 Evaluation
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
Given Microgen’s size and Board structure, performance evaluation is an ongoing process. A performance evaluation is undertaken for all directors at the time of their proposed reappointment. The Group Finance Director receives an annual performance appraisal as part of the Senior Management Bonus Scheme. The performance of each Board Committee is reviewed on an annual basis.
7 Re-election
All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
Non-executive directors are appointed for specific terms, up to a maximum of three years and re-appointment is not automatic. All directors offer themselves for election at the Annual General Meeting following their appointment and for re-election thereafter in accordance with the Company’s articles, which require one-third of directors to retire in rotation at each Annual General Meeting. The Board sets out to shareholders in papers accompanying a resolution to elect a non-executive director why they believe an individual should be elected. The Chairman confirms to shareholders when proposing re-election that the non-executive director’s performance remains effective.
C ACCOUNTABILITY AND AUDIT
1 Financial and Business Reporting
The board should present a balanced and understandable assessment of the company’s position and prospects.
The Board considers it is in compliance with this requirement.
2 Risk Management and Internal Control
The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain a sound risk management and internal control systems.
The Company operates a detailed internal control process which is reviewed at least on an annual basis by the Audit Committee and endorsed by the Board. Further information is provided in the Corporate Governance Statement.
3 Audit Committee and Auditors
The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.
The Audit Committee consists of all non-executive directors and meets at least three times a year. The Chairman and Group Finance Director are invited to attend but the Audit Committee meets at least annually with the company’s auditors without the other directors present.The Board ensures that at least one member of the audit committee has recent and relevant financial experience.
D REMUNERATION
1 The Level and Make-up of Remuneration
Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.
The Directors’ Remuneration Report provides details of the executive directors’ remuneration.
2 Procedure
There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.
Remuneration packages for individual directors are set by the Remuneration Committee after receiving information from independent sources and if required the company’s Human Resources function. The Chairman and Group Finance Director may be invited to attend the Committee’s meetings.
E RELATIONS WITH SHAREHOLDERS
1 Dialogue with Shareholders
There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
The Chairman and Group Finance Director meet on a regular basis with the Company’s major shareholders. Non-executive directors are available to meet institutional shareholders if requested.
2 Constructive Use of the Annual General Meeting
The board should use the Annual General Meeting to communicate with investors and to encourage their participation.
The Company arranges for the Notice of the Annual General Meeting and related papers to be sent to shareholders at least 20 working days before the meeting. All continuing directors make themselves available at the Annual General Meeting to respond to any questions raised by the investors in attendance.

Page references are in relation to the 2014 Annual Report.