Statement of corporate governance
The following sections explain how the Company applies the principles and supporting principles of the Combined Code on Corporate Governance 2006 (the “Code”).
The Board
The Board is chaired by Philip Hampton. The Board consists of three Executive Directors and six Non-Executive Directors. Dr John McAdam, is the Senior Independent Director. Mike Coupe was appointed as an Executive Director and Mary Harris was appointed as a Non-Executive Director on 1 August 2007.
Biographical details of the Directors are set out here.
The Board held 16 meetings during the year, including a two-day strategy conference and meetings relating to two potential takeovers of the Company by the private equity consortium led by CVC and by Delta (Two) Limited. The Non-Executive Directors met during the year without the Executive Directors or the Chairman being present.
Division of responsibilities
There is a clear division of responsibilities between the Chairman and the Chief Executive which is set out in writing and has been approved by the Board. Philip Hampton is responsible for leadership of the Board, setting its agenda and monitoring its effectiveness. He ensures effective communication with shareholders and that the Board is aware of the views of major shareholders. He facilitates both the contribution of the Non-Executive Directors and constructive relations between the Executive and Non-Executive Directors. He ensures that the Chief Executive develops a strategy which is supported by the Board as a whole. Justin King is responsible for executing the strategy, once agreed by the Board. He creates a framework of values, organisation and objectives to ensure the successful delivery of key targets, and allocates decision making and responsibilities accordingly. He takes a leading role, with the Chairman, in the relationship with all external agencies and in promoting Sainsbury’s.
Independence/Non-Executive Directors
The Chairman satisfied the independence criteria of the Code on his appointment and all the Non-Executive Directors who have served during the year are considered to be independent according to the principles of the Code. Bob Stack is a Director of Cadbury Schweppes plc which supplies products to Sainsbury’s, but neither the Board, nor Cadbury Schweppes, considers the relationship to be material in the context of their overall businesses.
The Non-Executive Directors bring wide and varied commercial experience to Board and Committee deliberations. They are appointed for an initial three-year term, subject to election by shareholders at the first AGM after their appointment, after which their appointment may be extended for a second term, subject to mutual agreement and shareholder approval.
The Board’s role
The Board is focused on delivering sustainable added value for shareholders. It considers strategic issues, key projects and major investments and regularly monitors performance against delivery of the agreed key targets. It approves the corporate plan and the annual budget and reviews performance against targets at every meeting. These and other key responsibilities are formally reserved powers of the Board.
The Board considered a number of specific projects and initiatives during the year, particularly the two potential takeover approaches made by the private equity consortium led by CVC and by Delta (Two) Limited. The Board also considered and approved joint ventures with Land Securities plc (which combines the retail and development expertise of the two companies to develop Sainsbury’s supermarkets anchored developments) and British Land plc (in order to extend and develop trading stores to improve the customer offer and value). It considered carefully the Group’s capital structure, in particular the ownership structure of the Group’s freehold property assets, including the merits of separating these from the retail operating business. It monitored the progress of the investigation by the Competition Commission into grocery retailing in the UK, and reviewed the Company’s development, leadership and succession planning programmes.
The Board delegates certain responsibilities to its principal committees. The Corporate Responsibility (“CR”) Committee reviews key CR policy, taking into account the Company’s CR objectives and the overall strategic plan. Through the Audit Committee, the Directors ensure the integrity of financial information, the effectiveness of the financial controls and the internal control and risk management systems. The Remuneration Committee sets the remuneration policy for Executive Directors and determines their individual remuneration arrangements. The Nomination Committee recommends the appointment of Board Directors and has responsibility for evaluating the balance of the Board and for succession planning at Board level. Further details are set out below.
Attendance
During the year the Directors attended the following number of meetings of the Board and its Committees (the number of meetings held whilst they were Directors is shown in brackets):
| Board |
Audit Committee |
CR Committee |
Nomination Committee |
Remuneration Committee |
|
|---|---|---|---|---|---|
| Mike Coupe1 | 9(9) | – | – | – | – |
| Anna Ford | 15(16) | – | 2(2) | 2(2) | 4(4) |
| Val Gooding | 14(16) | – | – | 2(2) | 3(4) |
| Philip Hampton | 16(16) | – | 2(2) | 2(2) | – |
| Mary Harris1 | 9(9) | 2(2) | 1(1) | 1(1) | – |
| Gary Hughes | 14(16) | 4(4) | – | 2(2) | – |
| Justin King | 16(16) | – | 2(2) | – | – |
| John McAdam | 16(16) | 4(4) | – | 2(2) | – |
| Darren Shapland | 16(16) | – | – | – | – |
| Bob Stack | 15(16) | – | – | 2(2) | 4(4) |
- Appointed to the Board on 1 August 2007.
Information and development
The quality and supply of information provided to the Board is reviewed as part of the Board evaluation exercise. The Chairman is responsible for ensuring that all Directors are properly briefed on issues arising at Board meetings and that they have full and timely access to relevant information.
There is an agreed procedure by which members of the Board may take independent professional advice at the Company’s expense in the furtherance of their duties. The Company has a programme for meeting Directors’ training and development requirements. Newly appointed Directors who do not have previous public company experience at Board level are provided with appropriate training on their role and responsibilities. New Directors participate in a comprehensive and tailored induction programme including store and depot visits and meetings with members of the Operating Board, senior management and external advisors. Subsequent training is available on an ongoing basis to meet particular needs with the emphasis on governance and accounting developments. During the year the Company Secretary, Tim Fallowfield, has provided updates to the Board on relevant governance matters, new legislation and on Directors’ duties and obligations, whilst the Audit Committee regularly considers new accounting developments through presentations from management and the external auditors. The Board programme includes presentations from management which, together with site visits, increases the Non-Executive Directors’ understanding of the business and the sector.
All Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for governance matters. The appointment and removal of the Company Secretary is one of the matters reserved for the Board.
Board evaluation
The Board agreed that this year’s evaluation exercise should be conducted by the Company Secretary. Having agreed the key objectives with the Chairman, the Company Secretary prepared a detailed questionnaire and then met with each Director separately to discuss the Board’s role and structure, process and relationships, and any emerging issues. The performance of the Board Committees was also reviewed. The Company Secretary then presented the findings to the Board, identifying what was working well and areas which could be improved or approached differently. The Board concluded that it was satisfied with the progress that had been made during the year and that it was working effectively. An action plan was agreed to address the themes which emerged from the exercise, with some additional items being added to the Board’s agenda for the 2008/09 financial year.
The Senior Independent Director reviewed the Chairman‘s performance and subsequently met with him to provide feedback to him. The Chairman separately reviewed the contribution of each of the Directors with them.
Operating Board
Day-to-day management of the Company is delegated to the Operating Board, which is chaired by Justin King. The Operating Board held ten formal meetings during the year. Directors' responsibilities are accessed here. It has formal terms of reference setting out its key responsibilities. Minutes are copied to the Chairman and Non-Executive Directors. Operating Board members regularly attend and present at Board meetings as well as the strategy conference.
The Operating Board has delegated certain powers to the Trading Board, the Retail Board and the Investment Board and receives regular reports from the Health and Safety Committee, the Product Safety Committee and the Corporate Responsibility Steering Group.
Board Committees
The Board has delegated certain responsibilities to the Nomination, Remuneration, Corporate Responsibility and Audit Committees.
Nomination Committee
The Nomination Committee is chaired by Philip Hampton and comprises each of the Non-Executive Directors. Justin King is not a member of the Committee although he is invited to attend meetings.
The Committee has reviewed succession planning and senior management development during the year, and the composition and balance of the Board, and the Committee recommended to the Board that Mike Coupe and Mary Harris be appointed as Directors. The Committee led the recruitment process, which resulted in Mary Harris being appointed. Search consultants were instructed by the Committee in connection with this appointment having considered the skills, knowledge, background and experience required for the role, and a job specification was prepared. The Committee also specified the time commitment expected of the role. Profiles of a shortlist of preferred candidates were prepared for the Committee and the potential composition and mix of the candidates were considered from a team perspective in order to ensure a complementary combination of competencies and experience. Prior to Mary Harris’ appointment the Committee considered a full range of references and the Non-Executive Directors took the opportunity to meet her separately.
The Committee’s terms of reference are available on the website (www.j-sainsbury.co.uk/governance) and set out the Committee’s responsibilities. The Committee meets when necessary and in 2007/08 met formally on two occasions and received further regular updates on the recruitment process.
Remuneration Committee
The Committee is chaired by Bob Stack who was appointed a Non-Executive Director and Chairman of the Committee on 1 January 2005. The Remuneration report is set out here.
Corporate Responsibility Committee
The Committee is chaired by Anna Ford, and Justin King and Mary Harris are its members. It met twice during the year. Formal meetings are supported by CR strategic meetings hosted by Anna Ford and Justin King. Each meeting is based around one of our five CR principles and key external stakeholders are invited to attend. During the year five meetings were held, relating to each of the five principles.
At operational level, Justin King is the overall CR champion and chairs the CR Steering Group, attended by the five Operating Board Directors who champion each of our five CR principles.
A summary of the Company’s corporate responsibility priorities and activities are set out here. This year’s Corporate Responsibility report will be published in June 2008.
The Association of British Insurers recommends that the Board considers material risks and control processes relating to corporate responsibility. The Board receives an annual update on health and safety and product safety, and relevant controls and governance, and any specific issues are reported to the Board as they occur. In addition the Audit Committee’s review of the system of internal controls and risk management processes referred to below includes corporate responsibility and the Committee considers any major corporate responsibility or brand reputation risks identified by the process, to the extent any such exist. The induction programme for new Board Directors includes a full review of corporate responsibility.
Audit Committee
The Committee is chaired by Gary Hughes with John McAdam and Mary Harris (from her appointment on 1 August 2007) as its other members, all of whom are independent Non-Executive Directors. Following Jamie Dundas’ retirement from the Board on 2 February 2007, until Mary Harris was appointed the Committee membership comprised only two independent Non-Executive Directors, but Philip Hampton, who has extensive financial experience, attended all meetings of the Committee including the two meetings of the Committee during this period. The Board has determined that Gary Hughes has recent and relevant financial experience. Philip Hampton, Justin King, Darren Shapland, Karen Whitworth, Director of Group Internal Audit, other senior members of the Finance Division and the external auditors are invited to attend Committee meetings. The Company Secretary acts as secretary to the Committee.
During the year the Committee met on four occasions, the agendas being organised around the Company’s reporting cycle. It monitored the integrity of the financial statements and any formal announcements relating to the Company’s financial performance and reviewed any significant financial judgements contained in them. The Committee has also reviewed the effectiveness of the Company’s financial controls and the internal control and risk management systems and has monitored progress to ensure that any required remedial action has been or is being taken on any identified weaknesses.
The Committee reviewed PricewaterhouseCoopers LLP’s (“PwC”) overall work plan and approved their remuneration and terms of engagement and considered in detail the results of the audit, PwC’s performance and independence and the effectiveness of the overall audit process. The Committee recommended PwC’s re-appointment as auditors to the Board and this resolution will be put to shareholders at the AGM.
The Committee has implemented the Company’s policy which restricts the engagement of PwC in relation to non-audit services. The policy is designed to ensure that the provision of such services does not have an impact on the external auditors’ independence and objectivity. It identifies certain types of engagement that the external auditors shall not undertake and others (such as tax planning and mergers and acquisitions advice) that can only be undertaken with appropriate authority from the Committee Chairman or the Committee where non-audit fees will exceed pre-set thresholds. The Committee receives a report at each meeting on the non-audit services being provided and the cumulative total of non-audit fees. In the event that cumulative non-audit fees exceed the audit fee then all subsequent non-audit expenditure must be approved by the Committee Chairman. The majority of the non-audit work undertaken during 2007/08 related to corporation tax and VAT advice but work was also carried out on the takeover proposals and accounting advice on specific transactions. The non-audit fees for the year were £0.7 million and the audit fee for the year in respect of the Group, Company and its subsidiaries was £0.8 million.
The Committee has regularly reviewed the Internal Audit department’s resources, budget, work programme, results and management’s implementation of its recommendations. During the year the Committee approved the appointment of Karen Whitworth as the new Director of Group Internal Audit. She has direct access to the Committee Chairman and Philip Hampton. Gary Hughes has held separate meetings with her and PwC during the year. The Committee regularly met with PwC without management being present, and may meet the Director of Group Internal Audit separately if it deems necessary.
The Committee has reviewed the Company’s ’whistleblowing’ procedures during the year and confirmed that arrangements are in place to enable colleagues and suppliers to raise concerns about possible improprieties on a confidential basis.
The Company has a fraud policy and has established a Serious Fraud Committee, which convenes in the event of serious incidents to oversee case management and ensure preventative measures are taken. The Audit Committee receives an update at each meeting of all material frauds and the actions taken.
The Committee’s terms of reference, which are available on the website (www.j-sainsbury.co.uk/governance), set out the Committee’s responsibilities.
Internal control
The Board has overall responsibility for the system of internal controls, including risk management, and has delegated certain of these responsibilities to the Audit Committee. The Audit Committee has reviewed the effectiveness of the system of internal control and ensured that any required remedial action has or is being taken on any identified weaknesses. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve the Company’s business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. It includes all controls including financial, operational and compliance controls and risk management procedures.
The processes used to assess the effectiveness of the internal control systems are ongoing, enabling a cumulative assessment to be made, and include the following:
- discussion and approval by the Board of the Company’s strategic direction, plans and objectives and the risks to achieving them;
- review and approval by the Board of budgets and forecasts, including both revenue and capital expenditure;
- regular operational and financial reviews of performance against budgets and forecasts by management and the Board;
- regular reviews by management of the risks to achieving objectives and actions being taken to mitigate them;
- regular reviews by the Board and Audit Committee of identified fraudulent activity and any whistleblowing by colleagues or suppliers, and actions being taken to remedy any control weaknesses;
- regular reviews by management and the Audit Committee of the scope and results of internal audit work across the Company and of the implementation of recommendations. The scope of the work covers all key activities of the Company and concentrates on higher risk areas;
- reviews of the scope of the work of the external auditors by the Audit Committee and any significant issues arising;
- reviews by the Audit Committee of accounting policies and levels of delegated authority; and
- consideration by the Board and by the Audit Committee of the major risks facing the Group and of the procedures in place to manage them. These include health and safety, product safety, legal compliance, litigation, quality assurance, insurance and security and reputational, social, ethical and environmental risks.
There is a continuous process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place throughout the year and up to the date of approval of the Annual Report and Financial Statements and accords with the Turnbull guidance (2005).
The effectiveness of the process is reviewed annually by the Audit Committee which then reports to the Board. The process consists of:
- formal identification by management of each division of the key risks to achieving their business objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated and actions necessary to mitigate them are identified. The risks and progress in mitigating them are regularly reviewed at divisional leadership team meetings as part of their normal business activities;
- certification by management that they are responsible for managing the risks to their business objectives and that the internal controls are such that they provide reasonable but not absolute assurance that the risks in their areas of responsibility are appropriately identified, evaluated and managed;
- reporting and review by the Operating Board of risk management activities and actions to improve their effectiveness;
- assurance from specialist functions and committees that legal and regulatory, health and safety, product safety, social, ethical and environmental risks are appropriately identified and managed; and
- independent assurance by Internal Audit as to the existence and effectiveness of the risk management activities described by management.
The system of internal control and risk management is embedded into the operations of the Company, and the actions taken to mitigate any weaknesses are carefully monitored.
Investor relations
The Company is committed to maintaining good communications with investors. Normal shareholder contact is the responsibility of the Chief Executive, Chief Financial Officer and Head of Investor Relations. The Chairman, Philip Hampton, is generally available to shareholders and meets with institutional and other large investors as required.
There is a regular dialogue with institutional and other large investors who, along with buyside and sellside analysts, are invited to presentations by the Company immediately after the announcement of the Company’s interim and full year results. They are also invited to participate in conference calls following the announcement of the Company’s trading statements. The content of these presentations and conference calls are webcast and are posted on the Company’s website (www.j-sainsbury.co.uk/investors) so as to be available to all investors.
To ensure that the Board understand the views of the major shareholders, Makinson Cowell provide investor relations consultancy services to the Company and report to the Board on the views of institutional investors and sellside analysts. Non-Executive Directors also receive regular market reports and broker updates from the Company’s Investor Relations department.
Shareholders have the opportunity to meet and question the Board at the AGM, which will be held on 15 July 2008. There will be a display of various aspects of the Company’s activities and Justin King will make a business presentation. A detailed explanation of each item of special business to be considered at the AGM is included with the Notice of Meeting which will be sent to shareholders at least 20 working days before the meeting. All resolutions proposed at the AGM will be taken on a poll vote. This follows best practice guidelines and enables the Company to count all votes, not just those of shareholders who attend the meeting.
Information on matters of particular interest to investors is set out here and on the Company’s website (www.j-sainsbury.co.uk/investors).
Compliance statement
During the year, the Company has complied with the provisions of the Code with the exception that, as explained above, the Audit Committee had only two Independent Directors as members instead of three until Mary Harris was appointed on 1 August 2007.