Annual Report & Accounts 2010

The Combined Code

Principles of Good Governance: Part 2

The Remuneration Committee

The Remuneration Committee comprises the Non-Executive Directors only and is chaired by Mr R J Harrison OBE. The Remuneration Committee has access to external research on market data and trends provided by an independent experienced consultant. New Bridge Street Consultants LLP, who have no other connection with the Company, continued to be the Company’s advisors during the year. Information is available in the Report of the Remuneration Committee.

The Committee decides on all aspects of the remuneration of the Executive Directors and the Chairman including basic salaries, performance related elements like short and long term bonuses, share options and other benefits. It advises the Board on matters relating to the remuneration of the Group as a whole such as pay rises, Group wide SAYE schemes, Executive Share schemes or grants for Executives other than main Board Directors. The remuneration of Non-Executive Directors is determined by the Board.

The Nomination Committee

The Nomination Committee comprises the Non-Executive Directors and the Group Chief Executive and is chaired by Mr P T Warry. Appointments to Executive Director are fully discussed by the Chairman and Group Chief Executive with the Remuneration and Nomination Committees before a proposal is formally made to the Board by the Chairman of the Nomination Committee. Possible new Non-Executive Directors are chosen from a shortlist supplied by external consultants in light of the requirements of the Group’s business and the need to have a balanced Board. Recruitment consultants are used to assist the process.

Following the appointment of a new Director, the Chairman, in conjunction with the Group Company Secretary and the Group Chief Executive, is responsible for ensuring that a full, formal and tailored induction to the Company is given. The Nomination Committee meets at least annually and reviews the structure, size and composition of the Board and makes recommendations for any changes. It discusses and gives full consideration to succession planning at both Group level and the management level immediately below. Candidates are identified and nominated to fill Group vacancies both Executive and Non-Executive, as and when they arise.

The Audit Committee

The Audit Committee comprises the Non-Executive Directors and the Group Chairman only and has been chaired by Mr T Osbaldiston since his appointment on 1 January 2004, who as the Finance Director of Raymarine PLC (until May 2010), has recent and relevant financial expertise. The Board considers that the membership of the Audit Committee as a whole has sufficient recent and relevant financial experience to discharge its functions. Executive Directors, external auditors and the internal auditors also attend by invitation as required. The Committee monitors the integrity of the financial statements of the Group and reviews significant financial reporting issues. The effectiveness of internal controls and risk management systems are kept under review. Through the Group’s Whistle Blowing Policy, employees of the Group may raise concerns about possible improprieties in financial reporting, other operational matters or inappropriate personal behaviours in the work place. Whistle blowing incidents and their outcome are reported to the Audit Committee. The Chairman of the Audit Committee meets with both the external and internal auditors on several occasions during the year without Executive Directors being present.

The Committee ensures that an adequate, properly resourced and supported internal audit function is in place and monitors and reviews its effectiveness. The effectiveness of the external audit is also reviewed and the Committee ensures that recommendations are acted upon by management.

The external auditors have direct access to the Chairman of the Audit Committee and meet with him without management present. The Audit Committee meets at least twice a year and has overall responsibility for monitoring the Group’s systems of internal financial control, the external and internal reporting processes and the financial control environment of the Group. The Audit Committee reviews the scope and results of the audit, its cost effectiveness, and the independence and objectivity of the auditors. PricewaterhouseCoopers LLP (‘PwC’) are engaged as the external auditors to all the Group’s companies and have held the role for over 30 years. Details of audit and non-audit fees are set out in note 2 to the financial statements. Non-audit fees principally relate to taxation advice. All services performed by PwC are carried out in accordance with the requirements of the UK Auditing Practices Boards’ Ethical Standard 5, relating to non-audit services performed by the Company’s auditors.

The Committee has undertaken its annual review of the qualification, expertise, resources and independence of the external auditors and the effectiveness of the external audit process by: reviewing, and approving, PwC’s plans for the audit of the Group’s financial statements, the terms of engagement for the audit and the proposed audit fee; considering the views of Directors, senior management and the PwC engagement partner on PwC’s independence, objectivity, integrity, audit strategy and its relationship with the Group, obtained by way of interview; and taking into account information provided by PwC on their independence and quality control procedures. In making its recommendation to the Board that PwC be reappointed for a further year, the Committee took into account their tenure as auditors and considered whether there should be a full tender process. There were no contractual obligations restricting the Committee’s choice of external auditors.

Executive Committee

The Executive Committee is responsible for implementing the strategies and policies determined by the Board, managing the business and affairs of the Company, prioritising human resources and establishing best management practices. The Executive Committee is also responsible for monitoring the Divisional Boards’ performance.

The Executive Committee is currently comprised of Gavin Slark (Chairman) – Group Chief Executive, Roddy Murray – Group Finance Director, Frank Elkins – Executive Director and MD of BSS Industrial, Kelvin Stevens – MD of PTS, Howard Luft – MD of Buck & Hickman, Mark Earnshaw – MD of F & P Wholesale, Anthony Smith – MD of Birchwood Products, Kelvin Liscombe – Corporate Development Director, Sandra Smith – Group Human Resources Director, Jonathan Jennings – Group Central Services Director, Mike Spalding – Group IT Director and Ute Ball – Group Company Secretary.

Internal Control

The Board is responsible for the Group’s system of internal control and has reviewed its effectiveness during the year. The Combined Code requires that the Directors review the effectiveness of the Group’s system of internal control which includes financial, operational, compliance and risk management controls.

The system of internal control is designed to safeguard the assets of the Group, ensure the accuracy of its reporting and enable efficient operations and compliance with laws and regulations. In establishing this system, the Directors considered the nature of the Group’s business, including the materiality of the risks being run, the likelihood of a loss being incurred and the costs of control and mitigation of likely losses. It therefore follows that the system of internal control can only provide reasonable and not absolute assurance.

An ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place from the beginning of the financial year to the date of approval of the Annual Report and Accounts. The process is regularly reviewed by the Board and accords with the Internal Control Guidance for Directors and the Combined Code produced by the Turnbull Guidance 2005.

The processes by which the Board review the effectiveness of the internal control system include the following:

• An established framework of internal financial control including independent check, which includes a clearly defined management structure and comprehensive systems of budgeting and financial reporting which are reviewed by successive levels of management
• Guidelines for capital expenditure which include budgets, appraisal and review procedures and successive authorisation levels
• Internal financial controls and procedures for branches are included in branch operating manuals
• All trading locations are reviewed regularly by the Internal Audit department, and the Audit Committee receives reports from the internal and external auditors on a regular basis
• The Executive Management Committee receives a monthly summary of financial results and the Group’s published biannual financial information is based on a standardised reporting process

The Group also has in place systems and procedures for existing control and managing risk in respect of financial reporting and the preparation of consolidated accounts.

The Directors have also reviewed the effectiveness of the system of internal financial control during the period in conjunction with the work of the Internal Audit department in relation to the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information used within the business and for publication.

Investor Relations

Communication with all shareholders is given a high priority. Formal communications accounting for the Company’s performance and strategy are principally through the Annual Report and Accounts and announcements made through the Stock Exchange and at the Annual General Meeting. In addition, corporate information is made available to investors on the Company’s website (www.bssgroup.com).

Presentations are made to institutional shareholders following the announcement of the Company’s full year and interim results, and regular meetings are held between these investors and the Group Chief Executive and the Group Finance Director. In addition, institutional shareholders have visited some of the Group’s distribution centres. The Chairman attends some of the meetings with investors and is available to meet with institutional investors upon request.

All members of the Board, including the Non-Executive Directors, receive a report on any significant discussions with shareholders and the feedback that follows the interim and yearly presentations to investment analysts and shareholders. All Directors attend the Annual General Meeting and the Board encourages shareholders to attend its Annual General Meeting. Directors, including the Chairmen of the Committees, are present to answer any questions from shareholders. The Notice of the Meeting is sent to shareholders at least 20 working days before the meeting. The results of proxy voting by shareholders will be disclosed for each separate resolution and will be posted on the Company’s website as well as disclosed upon request.

Mr R J Harrison OBE, has held the post of Senior Independent Director since 3 August 2006 and is the Director whom shareholders may contact if they feel their concerns are not being addressed.

Going Concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review section. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review section. In addition notes 13 and 16 to the financial statements include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.

The Group has reviewed its key risk areas and in particular liquidity risk in relation to its bank facilities, credit risk associated with the Group’s key customers and the risk of reduced demand for its products due to the current economic downturn in the United Kingdom. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. The Group renegotiated its Revolving Credit Facility during April 2009 and therefore now has £90m debt not due for repayment until 2012, £43m not due until 2013 and £29m not due until 2016.

After making enquiries, the Directors have reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.