Effective corporate governance is essential to the success of our business.
As Chairman, my role is to manage the Board, ensuring it operates effectively and contains the right balance of skills and experience to successfully execute the strategy. The Board is collectively responsible for the long term success of the Company and for setting and executing the strategy.
Over many years, NEXT has successfully grown its business and created significant shareholder value against the backdrop of a challenging external environment. This is the ultimate measure of our success and reflects our strong corporate governance structure and the stable, effective management team we have in place. We remain committed to the robust approach to governance which has served the business well.
The Group complied throughout the year under review with the provisions set out in the UK Corporate Governance Code and the UK FSA Disclosure and Transparency Rules. Disclosures required by DTR7.2.6 with regard to share capital are presented in the 'Share capital and major shareholders' and 'Additional information' sections of the Directors' Report.
Board composition and succession
The Board includes five independent non-executive directors and the Chairman who bring considerable knowledge, judgement and experience to the Group. The Board has a good record of recruiting new non-executive directors at regular intervals to achieve appropriate rotation and continuity. The UK Corporate Governance Code states that Boards should pay particular attention to the independence of non-executives if they have served on the Board for more than nine years from the date of their first election. Jonathan Dawson is the longest serving non-executive director, having been first elected at the AGM in 2005 following his appointment the previous year. The ninth anniversary of his first election is therefore May 2014, although he will have served as a director for nine years in May 2013. The Board considers that all of its non-executive directors remain independent in character and judgement, and their knowledge, experience and other business interests continue to enable them to contribute significantly to the work of the Board. Terms and conditions of appointment of non-executive directors are available for inspection at the Company's registered office during normal business hours.
Appointments to the Board, as with other positions within the Group, are made on merit according to the balance of skills and experience offered by prospective candidates. Whilst acknowledging the benefits of diversity, individual appointments are made irrespective of personal characteristics such as race, religion or gender. The Board is comprised of eight male directors and two female directors. Below the Board, at senior management level there are 13 male directors and 11 female directors. NEXT has a successful history of promoting internal candidates to most senior management and executive Board positions through career development; it is expected that most future appointees will come from within the Group.
The Company's Articles of Association require directors to submit themselves for re-election by shareholders at least once every three years, however the Board has determined that all directors will stand for election at each AGM in accordance with the UK Corporate Governance Code.
The Board is responsible for major policy decisions whilst delegating more detailed matters to its committees and officers including the Chief Executive. The Board is responsible for the Group's system of internal control and for monitoring implementation of its policies by the Chief Executive. The system of internal control 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 holds regular meetings where it approves major decisions, including significant items of capital expenditure, investments, treasury and dividend policy. Board papers including reports from the Chief Executive and Finance, Property and Product Directors are circulated in advance of each Board meeting. The Board is responsible for approving semi-annual group budgets. Performance against budget is reported to the Board monthly and any substantial variances are explained. Forecasts for each half year are revised and reviewed monthly. Certain other important matters are subject to weekly or monthly reporting to the Board or Board Committee, including sales, treasury operations and capital expenditure. There is a regular flow of written and verbal information between all directors irrespective of the timing of meetings.
All new directors receive a personalised induction programme, tailored to their experience, background and understanding of the Group's operations. Individual training needs are reviewed regularly and training is provided where a need is identified or requested. All directors receive frequent updates on a variety of issues relevant to the group's business, including regulatory and governance issues.
Meetings of the non-executive directors without the executive directors being present are held at least annually, both with and without the Chairman. The Company Secretary attends all Board meetings and is responsible for advising the Board on corporate governance matters and facilitating the flow of information within the Board.
The Board has appointed committees to carry out certain of its duties, three of which are detailed below. Each of these is chaired by a different director and has written terms of reference which are available for inspection on the Company's website (www.nextplc.co.uk) or on request.
Attendance at meetings
The Board held seven formal meetings during the year and these were fully attended with the exception of one meeting which Mr Angelides was unable to attend. The Audit Committee, Remuneration Committee and Nomination Committee held four, five and three meetings in the year respectively and all serving members attended with the exception of one Remuneration Committee meeting which Ms Goodall was unable to attend and one Nomination Committee meeting which Mrs Cross was unable to attend.
Audit Committee and external audit
The Committee consists of the five (previously four) independent non-executive directors including the senior non-executive director and at least one member (Steve Barber, the Committee Chairman) with recent and relevant financial experience.
The Committee holds regular, structured meetings and consults with external auditors and senior management, including internal audit, where appropriate. The Chairman of the Group, executive directors and other members of senior management attend meetings by invitation or as required.
The Committee's review of the interim and full year financial statements focused on the following significant areas:
- Directory receivables and related provisions for doubtful debts which, at £601m, represent the largest asset on the Group's balance sheet.
- Pension fund accounting and actuarial reports. Prepared in accordance with International Accounting Standards, the Group's balance sheet shows a pension asset of £66m, and the income statement includes exceptional pension items of £36m as a result of events during the year. The assumptions underlying these calculations are highly sensitive to small changes, particularly in respect of discount rates (see Note 21 to the accounts).
- Treasury transactions. The Group buys currencies forward in order to hedge its future product purchases, which in turn enables it to set its prices and margins. A number of different instruments are used to provide such cover and their valuation and accounting treatment is reviewed.
- Provisioning. There is a need to make industry specific and other judgmental provisions, including against stocks, rates of customer returns, liabilities in respect of onerous leases, gift card redemptions, taxation and share schemes.
These items were also addressed at the planning stage of the external audit and there were no significant disagreements between management and the external auditor's conclusions.
The Committee received reports and presentations from senior management on various activities of the Group, including international Directory operations, warehousing and distribution, Directory credit risk management, treasury, tax and corporate responsibility matters including the Code of Practice. The Group's internal control functions in areas such as finance, IT, security and product are regularly reviewed by the Committee. The Committee receives frequent briefings on health and safety, risk management, business continuity, whistle blowing and corporate governance generally.
The Committee had discussions with the external auditor on audit planning, fees, accounting policies, internal control and audit findings. Meetings were also held with the auditor without management present, and the effectiveness and independence of the auditor has been assessed.
The Audit Committee is responsible for recommending the appointment, reappointment and removal of the external auditor. Consideration is given each year to putting the audit out to tender, however it was not considered necessary during the current year. Ernst & Young has been the Group's auditor for over 20 years with regular partner rotation, most recently in 2012. The Committee is satisfied that they continue to possess the skills and experience required to fulfill their duties effectively and efficiently. The appointment of the external auditor will continue to be reviewed annually and a tendering process will be undertaken to coincide with the rotation of the current audit partner in 2017, or earlier if the Committee considers it appropriate.
Ernst & Young have reported to the Committee that, in their professional judgement, they are independent within the meaning of regulatory and professional requirements and the objectivity of the audit engagement partner and audit staff is not impaired. The Audit Committee has reviewed this statement and concurs with its conclusion.
In order to ensure the continued independence and objectivity of the Group's external auditor, the Board has policies regarding the provision of non-audit services by the auditor. The Audit Committee's approval is required in advance for any non-audit services to be provided where the fees exceed £100,000 for an individual assignment or £150,000 in aggregate for the year. The Committee reviews details of audit and non-audit fees twice a year. Proposed assignments of non-audit services with anticipated fees in excess of £50,000 are generally subject to independent tender, and decisions on the allocation of work are made on the basis of competence, cost-effectiveness and relevant legislation. A tender process is not always undertaken where the auditor's existing knowledge of the Group enables them to provide the required services more cost-effectively than other parties, for example certain overseas taxation compliance services. The Group's auditor is prohibited from providing any services that would conflict with their statutory responsibilities.
The Committee has reviewed its terms of reference and composition and believes that both are appropriate.
The Committee consists of the Chairman and five independent non-executive directors. The Committee, which is chaired by the senior non-executive director, determines the remuneration of the executive directors and reviews that of senior management. A Remuneration Report is included in this Annual Report which summarises the activities of the Committee.
The Committee consists of the Chairman and five independent non-executive directors, including the senior non-executive director. The Committee meets whenever necessary to consider succession planning for directors and other senior executives, to ensure that requisite skills and expertise are available to the Board to address future challenges and opportunities.
External consultants have been used to assist in identifying suitable Board candidates, based on a written specification for each appointment. The Chairman is responsible for providing a shortlist of candidates for consideration by the Committee which then makes its recommendation for final approval by the Board.
There is a clear division of responsibilities between the offices of Chairman and Chief Executive, which is set out in writing and agreed by the Board. The Chairman manages the Board to ensure; that the Group has appropriate objectives and an effective strategy, that there is a Chief Executive with a team of executive directors able to implement the strategy, that there are procedures in place to inform the Board of performance against objectives, and that the Group is operating in accordance with a high standard of corporate governance.
The current Chairman was an independent non-executive director of the Company prior to his appointment as Chairman on 17 May 2006. His other significant commitments are noted in the Directors' and Officers section and the Board considers that these are not a constraint on his agreed time commitment to the Company.
The Board sets objectives and annual targets for the Chief Executive to achieve. The Board is responsible for general policy on how these objectives are achieved and delegates the implementation of that policy to the Chief Executive. The Chief Executive is required to report at each Board meeting all material matters affecting the Group and its performance.
The Chief Executive has delegated authority for the day to day management of the business to operational management drawn from executive directors and other senior management who have responsibility for the respective areas. The most important management meetings are the weekly NEXT Brand trading and capital expenditure meetings which consider the performance and development of the NEXT Brand through its different distribution channels. These meetings cover risk management of all business areas in respect of the NEXT Brand including product, sales, property, warehousing, systems and personnel. Key performance indicators are monitored daily and weekly.
Directors' conflicts of interest
In accordance with the Company's Articles of Association, the Board has a formal system in place for directors to declare situational conflicts to be considered for authorisation by those directors who have no interest in the matter being considered. In deciding whether to authorise a situational conflict, the non-conflicted directors consider the situation in conjunction with their general duties under the Companies Act 2006. They may impose limits or conditions when giving an authorisation, or subsequently if they think appropriate. Any situational conflicts considered by the Board, and any authorisations given, are recorded in the Board minutes and in a register of conflicts which is reviewed annually by the Board.
The performance of the Board was formally and independently evaluated during the year by PricewaterhouseCoopers. The review concluded that there were no significant weaknesses or risks that required attention.
The senior independent non-executive director appraises the performance of the Chairman through discussions with all the directors individually and, together with the Chairman, appraises the performance of the Chief Executive. The performance of the executive directors is monitored throughout the year by the Chief Executive and the Chairman. The Chairman also monitors the performance of the non-executive directors.
The Board is responsible for the Group's risk management process and has delegated responsibility for its implementation to the Chief Executive and senior management best qualified in each area of the business. The Board sets guidance on the general level of risk which is acceptable and has a considered approach to evaluating risk and reward.
The Board confirms that it has carried out a review of the effectiveness of the Group's system of internal control including financial, operational, compliance and risk management. This includes identifying and evaluating key risks, determining control strategies and considering how they may impact on the achievement of the business objectives. The risk management process has been in place for the year under review and up to the date of approval of the Annual Report.
Risk management and internal control is a continuous process and has been considered by the Board on a regular basis during the year. The Board promotes the development of a strong control culture within the business. During the year the Board addressed the business risks which had been identified as key, taking into account any changes in circumstances over the period. The Audit Committee has reviewed the level of internal audit resource available within the Group and believes that it is adequate for the size, structure and business risks of the Group and is supplemented with appropriate external resources where needed.
The Board considers that the Group's management structure and continuous monitoring of key performance indicators provide the ability to identify promptly any material areas of concern. Business continuity plans, procedures manuals and codes of conduct are maintained in respect of specific major risk areas and business processes. Through these measures the management of business risk is an integral part of Group policy and the Board will continue to develop risk management and internal controls where necessary.
The use of a Group accounting manual and prescribed reporting requirements for finance teams throughout the Group ensures that the Group's accounting policies are clearly established and consistently applied. Information is appropriately reviewed and reconciled as part of the reporting process and the use of a standard reporting package by all entities in the Group ensures that information is presented consistently to facilitate the production of the consolidated financial statements.
Personal use of company assets
The Board carried out a review during the year and confirmed that there has been no improper personal use of company assets by directors. Policies are in place to ensure approval procedures are applied to expense claims and that these are in accordance with service agreements. The Remuneration Committee has reviewed the level of benefits in kind provided to executive directors.
Relations with shareholders
The Board's primary role is to promote the success of the Company and the interests of shareholders. The Board is accountable to shareholders for the performance and activities of the Group.
The Board communicates with its shareholders in respect of the Group's business activities through its Annual Report, yearly and half yearly announcements, interim management statements and other regular trading statements. Full year, interim and other public announcements are presented in a consistent format with a particular focus on making the presentations as meaningful, understandable and comparable as possible. This information is also made publicly available via the Company's website.
All shareholders have an opportunity to ask questions or represent their views to the Board at the Annual General Meeting. The Company's largest shareholders are invited to the annual and interim results presentations, at which executive and non-executive directors are present. Non-executive directors attend other meetings with shareholders if requested. Shareholder views are also communicated to the Board through the inclusion in Board reports of shareholder feedback and statements made by representative associations.
The Board takes care not to disseminate information of a share price sensitive nature which is not available to the market as a whole.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Directors' Report and Business Review. The Directors' Report also describes the Group's financial position, cash flows and borrowing facilities, further information on which is detailed in the financial statements. Information on the Group's financial management objectives, and how derivative instruments are used to hedge its capital, credit and liquidity risks is provided in Notes 27, 28, 29 and 30 of the financial statements.
The Directors report that, having reviewed current performance and forecasts, they have a reasonable expectation that the Group has adequate resources to continue its operations for the foreseeable future. For this reason, they have continued to adopt the going concern basis in preparing the financial statements.