Corporate Governance Report
In September 2014 changes were made to the UK Corporate Governance Code (the Code) effective from 1 October 2014. As a building society we are not required to fully comply with the Code, but we have regard to the Code when establishing and reviewing our own corporate governance arrangements. The Directors of the Society are committed to best practice in corporate governance. This Report highlights the best practice suggested by the Code by inclusion of the relevant paragraph and then explains the Society’s approach.
The Role of the Board
A.1. Every company should be headed by an effective Board, which is collectively responsible for the long-term success of the Company.
The Board is here to ensure our long term sustainability for the good of our members. We do this by setting our strategy to ensure we meet the needs of our members and regulators, remain competitive and deliver our services appropriately with a profit to help build our capital over the long term. The Board formulates our strategy, reviews business performance, oversees the identification and management of risks, adherence to laws and regulations and ensures that the required controls are in place and aligned to our strategy. The results achieved by the Society over recent years are a testament to the Board’s effectiveness.
The Board meets at least 11 times a year with two additional days dedicated to strategy. Board meetings have a formal schedule with Board packs circulated in a timely manner to ensure Board members can perform their duties effectively. Minutes record details of Board, Board Committee and Management meetings.
The Society has a process to evaluate, at least annually the performance and effectiveness of individual Directors, the Chairman, the Board and Board Committees. The performance of the Chief Executive is evaluated by the Chairman’s and Nominations Committee. This appraisal process includes a self assessment questionnaire and feedback from all members of the Board. The Chairman is evaluated by the Deputy Chairman, with assistance from the Senior Independent Director, after consulting and obtaining the views of the other Directors and the Executive Team. The Chairman also evaluates the performance of all the Non-Executive Directors on an annual basis. The Chief Executive evaluates the Finance Director as a member of the Executive Team. The Board also annually evaluates its overall performance and the performance of the Board Committees. Annually the various Committees are also subject to review and assessment, and their future membership and Terms of Reference agreed.
The Board has established four Committees. Board Risk and Compliance Committee and the Audit Committee meet at least quarterly, and the Remuneration Committee and Chairman’s and Nominations Committee meet at least twice a year. There are four management Committees; Assets and Liabilities Committee and Retail Credit Risk Committee both of which meet monthly, and the Conduct Risk Committee and Operational Risk Committee, both of which meet quarterly. The Terms of Reference for Committees can be found here.
The Committee oversees the effectiveness of the management of the risk environment. It does this by assessing the effectiveness and ensuring the adequacy of controls by reviewing the work of our Internal Auditor. It also makes judgements in financial reporting and regulation and assesses the effectiveness of the Internal Auditor. The Committee sets the Terms of Reference for our External Auditor and ensures their continued independence and effectiveness particularly around the provision of non-audit services. The Committee also ensures that the Society has an effective whistle-blowing process which enables employees to raise concerns confidentially. Minutes of the meetings are circulated to the Board, along with a report from the Chairman of the Audit Committee highlighting key issues for review by the Board.
At least annually this Committee meets with the External and Internal Auditors without the Executive Directors present. The Board is satisfied that the members of the Committee have specialist expertise including current and relevant financial, legal and risk management expertise.The Committee considers the appointment, performance and remuneration of the Internal Auditor and agrees the scope of the annual internal audit plan.
The Committee considers the Annual Report, Summary Financial Statement and Associated Reports including appraisal of accounting policies. It provides advice to the Board on whether the Annual Report and Accounts are fair, balanced and provide the information necessary for members to assess the Society’s performance. The Committee considers the appointment, removal, performance and remuneration of the External Auditor including consideration of any proposed non-audit services, the planning, scope and conclusion of the annual external audit including the receipt and response to the Auditor’s management letter.
Chairman's and Nominations Committee
The Committee is responsible for making recommendations to the Board on matters relating to the composition of the Board, including Board and Executive succession planning, the appointment of new Directors, election and re-election of Directors and the Chief Executive’s annual appraisal.
The Committee’s main role is to approve the remuneration and incentive schemes for the Society’s Executive and senior management. The Executive together with the Chairman meet annually to review Non-Executive Director fees, including those of the Deputy Chairman, Senior Independent Director, Chairman of the Audit Committee and Chairman of Board Risk and Compliance Committee. The Directors’ Remuneration Report can be found on pages 18 and 19 of the Annual Report.
Board Risk and Compliance Committee
The role of the Committee is to act as a second line of defence to the Society’s risk management framework. In 2016 the Committee’s Terms of Reference were amended to transfer the responsibility for overseeing the Society’s Compliance function from Audit Committee to Board Risk and Compliance Committee. The Committee assists the Board in fulfilling its oversight responsibilities by receiving regular reports from the Management Committees which enables the Committee to assess the risks involved in the firm’s business (including those risks that would threaten its business model, future performance, solvency or liquidity) and to consider the principal risks identified by management and consider if they are appropriate.
It reviews the Society’s Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). The Committee is responsible for ensuring the Society complies with the Board’s Risk Tolerance and Culture Policy. It also reviews the Society’s future risk strategy for economic, capital, liquidity, reputational and operational risk profiles. The Committee uses a variety of internal and external sources to make these assessments.
Assets and Liabilities Committee
This Committee manages wholesale credit risk (the risk of default on assets), liquidity risk (the risk that the Society will not be able to meet its financial obligations) and interest rate risk (arising from a mismatch between interest rate characteristics). This Committee is responsible for ensuring the Society operates within agreed parameters set out in the Board’s Liquidity and Financial Risk Management Policies. It is involved in the development of the Society’s ICAAP and ILAAP.
Conduct Risk Committee
The Committee manages Conduct Risk which is the risk that the Society’s behaviour results in inappropriate or poor outcomes for customers. The Committee meets to ensure there are robust systems and controls, skills and judgement to ensure positive outcomes for members and stakeholders. The Committee ensures compliance with the FCA Conduct of Business Rules, by reviewing and monitoring the Society’s conduct risk appetite, conduct risk register and conduct risk key risk indicators (KRIs).
Operational Risk Committee
This Committee considers operational risk, which is the risk of loss through inadequate or failed internal processes or systems, including human error or external events. The Committee ensures the risk register reflects these risks, identifying appropriate mitigation for likelihood and severity. The Committee ensures ongoing identification, control and mitigation of risks in the business.
Retail Credit Risk Committee
Retail credit risk arises when unexpected losses are incurred through non-repayment of mortgage lending. This Committee is responsible for monitoring the Society’s high level policy on lending. This includes ensuring the mortgage assets stay within agreed Board-approved levels, including reference to the PRA’s Specialist Sourcebook
for Building Societies. The Committee also ensures oversight and challenge to our underwriting policy and long-term credit risk approach. The Committee reviews the Society’s Lending Policy Statement, ensuring this aligns with our Risk Tolerance and Culture Policy; it then recommends this to the Board for approval.
Division of Responsibilities
A.2. 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.
A.3 . The Chairman is responsible for leadership of the Board and ensuring its effectiveness of all aspects of its role.
We have separate roles for Chairman and Chief Executive and these are held by different people. Each role has its own job description approved by the Board. No individual has autonomous powers of decision making. The Chairman is appointed by the Board annually.
Role of the Deputy Chairman
Throughout 2016 the Deputy Chairman was Derek Bowden. The Deputy Chairman acts as a sounding board for the Chairman and with the Senior Independent Director undertakes the Chairman’s annual appraisal. They also stand in for the Chairman in the event that they are unable to attend a meeting or perform their duties.
Role of the Senior Independent Director
During 2016 the Senior Independent Director was Michelle Tennens. The Senior Independent Director is available for members to refer issues to that they have not been able to resolve via the Chairman, Chief Executive or other Executive Directors or for matters where it is not appropriate to raise these issues directly with these Directors. The Senior Independent Director also assists the Deputy Chairman in performing the Chairman’s appraisal. Michelle is also the Society’s Whistleblowing Champion and provides an independent point of contact for members of staff who may wish to raise issues.
Role of the Executive team
Members of the Executive Team work with the Chief Executive and Board to ensure the effective implementation of strategies and policies within agreed budgets and timeframes. They hold a leadership role within the business, acting to ensure the correct culture is developed and that the relevant resources, people and systems are utilised efficiently and towards the aims of the corporate strategy and policies set by the Board. They are also responsible for the development of employees, delivering consistent high quality customer service standards, implementation of effective systems within the business and reporting and tracking progress towards our key performance indicators and key results indicators. The Executive Team is also responsible for designing, operating and monitoring risk management systems and controls.
A.4. As part of their role as members of a unitary Board, Non-Executive Directors should constructively challenge and help develop proposals on strategy.
The Non-Executive Directors of the Society are drawn from a wide range of backgrounds to ensure that the Board has the appropriate skills, knowledge and experience to provide a robust level of challenge and debate. The role requires an understanding of the risks in business, commercial leadership within a framework of prudent and effective risk management controls and the ability to monitor performance and resources whilst providing support to the Executive in developing the Society. We are currently recruiting for new Non-Executive Directors.
The Composition of the Board
B.1. 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.
As at 30 November, the Board consisted of seven Non-Executive Directors (including the Chairman) and three Executive Directors providing a balance of skills and experience appropriate for the requirements of the Society. The mix of the Board and Committees is reviewed annually by the Chairman’s and Nominations Committee to ensure that appropriate expertise and skills are maintained. One Non-Executive Director was appointed in 2016, subject to appointment at the AGM, providing retail financial services experience.
In the view of the Board, all of the Non-Executive Directors are independent in character and judgement, are free of any relationship or circumstance which could interfere with the exercise of their judgement, and bring wide and varied commercial experience to Board deliberations and continue to represent the interests of the Society’s members.
Richard Norrington was appointed as Executive Director following his appointment as Chief Executive Officer. Paul Winter has retired as a Director of the Society on 31 December 2016 following completion of his handover.
Appointments to the Board
B.2. There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.
The Society makes Non-Executive Director appointments on merit, based on the specific skills and experience required under the succession plan. The Chairman’s and Nominations Committee meet as necessary to oversee the Board succession plan. The Society has appointed an independent executive search agency to identify and shortlist candidates for positions on the Board. This agency follows a methodical process for searching and shortlisting candidates to conduct a broad search of the marketplace. In addition the Society has placed adverts in local newspapers and on social media. The Chairman’s and Nominations Committee lead the recruitment process, although the Board as a whole makes the final decision. During 2016 Stephen Reid was appointed as a Non-Executive Director of the Society.
During 2016 the Society appointed a new Chief Executive (with effect from 1 December 2016) following the announcement of Paul Winter’s retirement. The Society used the services of an external recruitment provider. A role specification was prepared setting out the expectations of a new Chief Executive and the competency and capability required in order to assist the recruitment provider’s search. A shortlist of four candidates was agreed. The candidates were interviewed by four members of the Board and the shortlist refined to two candidates. Both candidates attended the firm’s Head Office and met with members of the Senior Management Team. The candidates were then asked to give a presentation to all of the Society’s Non-Executive Directors. The presentation was followed by a full interview. Richard Norrington was appointed at the end of this process following a unanimous decision by the Non-Executive Directors.
All Directors must meet the tests of fitness and propriety designed by the Financial Conduct Authority and Prudential Regulation Authority and all Directors are required to be registered with the regulators as Senior Managers with responsibilities for specific areas of business allocated to them, together with their overall responsibility as a Director.
The Society is committed to diversity and currently has a 33% (2015: 37.5%) female representation on the Board and therefore exceeds the recommendations of the Davies Report which, for diversity purposes, has set a minimum target of 25% female representation.
B.3. All Directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.
The Chairman’s and Nominations Committee evaluate the ability of Directors to commit the time required for the role, prior to appointment. The formal appraisal process carried out by the Chairman each year also assesses whether Directors have demonstrated this ability during the year.
Set out following are details of the Directors during 2016 and their attendance record at Board meetings and relevant Board Committee meetings in the year. The number in brackets is the maximum number of scheduled meetings that each Director was eligible to attend.
It should be noted that in addition to attendance at the above meetings both Executive and Non-Executive Directors have been invited on occasions to attend Committees of which they are not members.
B.4. All Directors should receive induction on joining the Board and should regularly refresh their skills and knowledge.
The Society provides a formal induction for Non-Executive Directors tailored to their individual needs. This induction has recently been refreshed. The induction programme includes the nature of building societies, the wider financial services industry, Director’s responsibilities and duties, the management information they will be provided with and how to interpret this, information on the Society and its local market, an overview of the regulatory requirements together with details of any significant current issues for the industry. The Chairman ensures that Non-Executive Directors continually update their skills and knowledge to fulfil their role on the Board and Committees. Training and development needs are identified as part of the annual appraisal of the Board and individual Director performance and effectiveness; these needs are usually met by attendance at industry seminars and conferences, internal briefings and specialist speakers.
Information and support
B.5. 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 Chairman ensures that the Board receives information sufficient to enable it to discharge its responsibilities. Each Committee of the Board is responsible for evaluating the effectiveness of the information received and improvements are made where necessary. Board information is subject to on going review to ensure that it meets the needs of the Board in the current and future environment. The Executive Directors and/or the Secretary ensure that information requests are delivered in accordance with the requests of the Board.
B.6. The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.
Each Director has an annual performance appraisal carried out by the Chairman. The Chairman’s performance is facilitated through the Deputy Chairman and Senior Independent Director taking into account the views of all the Directors. The Chairman gives feedback to the Board on general issues of performance improvement following the appraisal process to allow it to review its own performance. The Board evaluates its overall performance and that of its Committees each year.
B.7. All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
Financial and business reporting
C.1. The Board should present a balanced and understandable assessment of the company’s position and prospects.
The Society’s Rules require that all Directors be submitted for election at the Annual General Meeting (AGM) following their appointment
to the Board and accordingly Stephen Reid and Richard Norrington stand for election in March 2017. Each Non-Executive Director is appointed to the Board for a term of up to three years, subject to satisfactory performance. After three terms the Board is required to review and satisfy itself of the continued independence of judgement and character of a Non-Executive Director prior to re-election. At the Annual General Meeting 2017 Michelle Tennens and Derek Bowden will have held office for over nine years. Derek will be retiring following the conclusion of the AGM. Michelle Tennens will be retiring during the 2017 year.
As a result the Board does not consider it necessary to put either Michelle or Derek forward for re-election. The Chairman’s and Nominations Committee has reviewed the independence, character and judgement of Michelle Tennens and confirms that she is able to commit the appropriate amount of time and demonstrate capability and independence for the short period during the year for which she will remain as a Non-Executive Director. In addition, the Board have agreed that Alan Harris will stand for re-election, having previously been elected in 2014.
Financial and business reporting
C.1. The Board should present a fair, balanced and understandable assessment of the company’s position and prospects.
The responsibilities of the Directors in relation to the preparation of the Society’s accounts and the statement that the business is a going concern are contained in the Directors’ Report on page 7and Directors’ Responsibilities on page 20 of the Annual Report.
Risk management and internal control
C.2 The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.
The Directors have a responsibility, both under the Building Societies Act and the Financial Services and Markets Act, to establish and maintain systems of control appropriate to the business. Executive Management is responsible for designing, operating and monitoring risk management systems and controls. The principal risks faced by the Society are set out in the Directors’ Report on page 10. Each Board and Management Committee is responsible for the risks and controls within its remit.
The Board Risk and Compliance Committee asseses the adequacy
of this process on behalf of the Board. The Internal Auditor provides independent assurance to the Board on the effectiveness of the system of internal control through the Audit Committee.
The information received and considered by the Audit Committee provided reasonable assurance that during the financial year there were no material breaches of control or regulatory standards, and that overall, the Society maintained an adequate system of internal control.
Audit Committee and Auditors
C.3. The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.
The role and membership of the Audit Committee have been set out earlier in the Corporate Governance Report.
The Society has engaged the Auditors historically for non-audit services which includes advice on corporation tax issues. The Board has a policy relating to the engagement of external auditors to supply non-audit services, the purpose of which is to ensure the continued independence and objectivity of the External Auditor.
The level & components of remuneration
D.1 Executive Directors’ remuneration should be designed to promote the long term success of the company. Performance- related elements should be transparent, stretching and rigorously applied. The Directors’ Remuneration Report on page 18 of the Annual Report explains how the Society complies with the Code Principles relating to remuneration.
Dialogue with shareholders
E.1. 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 Society does not have shareholders in the same way as a listed company; as a mutual society our members are our shareholders. The importance of listening to and engaging with members in the Society’s activities is an important part of its culture. We endeavour to elicit their views on the products and service being offered by the Society through market research and dialogue with our staff. We hold members events and do all we can to encourage members to attend and ask questions at the Annual General Meeting (AGM).
Constructive use of the Annual General Meeting (AGM)
E.2. The members of the Board should use the AGM to communicate with members of the Society and to encourage their participation.
Each year the Society sends details of the AGM and voting forms to those members eligible to vote. The resolutions include receipt of the Report and Accounts, election and re-election of Directors, the Director’s Remuneration Policy, and any other relevant matters. Members are provided with forms and given online access, which enable them to appoint a proxy to vote on their behalf if they are unable to attend in person. The distribution of AGM notices (with at least 21 clear days’ notice) and the receipt and counting of proxy votes is carried out by independent scrutineers. At the AGM a poll is called in relation to each resolution and the proxy votes cast are included in the result. The results are subsequently disclosed on the Society’s website.
The Society is keen to encourage as many members as possible to attend the Annual General Meeting as this gives the opportunity for members to meet the Society’s Directors and Executive Team to discuss issues that are of concern. The Chairmen of all the Committees are also available to answer any questions.
On behalf of the Directors
E. Sarah Evans
26 January 2017