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Southern Cross is committed to achieving the highest standards of corporate governance possible. The Board's Code of Ethics, which is subscribed to by all Directors, sets the tone for corporate behaviour. The principles of corporate governance set out in the Combined Code on Corporate Governance issued by the Financial Reporting Standards Council in June 2008 (‘the Combined Code') are fully supported by the Board.
This statement describes how the principles of the Combined Code have been applied to the Group in the current financial year.
The Board
The Board currently comprises three Non-Executive and three Executive Directors, in addition to the Non-Executive Chairman. During the period 8 October until 31 December 2008, the Chairman assumed executive responsibility pending the appointment of a Chief Executive on 1 January 2009. Biographical details of the current Directors are given here.
The roles of the Chairman and Chief Executive are clearly defined, approved by the Board and separate. The Chairman's primary responsibility is for leading the Board and ensuring its effectiveness. The Chief Executive is responsible for the executive management of the Group's operations and day-to-day business activities.
The Board of Southern Cross Healthcare Group PLC is collectively responsible for the success of the Group.
Its role is to:
Specific responsibilities are reserved to the Board, certain of which may be delegated in the first instance to Board Committees. The policies and procedures adopted by the Board are documented in a manual which sets out the roles and delegated authorities applying to the Board. This manual is updated whenever necessary.
To assist the Board in the stewardship of the Group, a comprehensive set of documents, which detail financial and operational performance, together with reports on personnel, developments, acquisitions and compliance matters, are provided to the Board. The Board has a formal schedule of matters reserved for its approval; these matters include approval of:
The Company Secretary is responsible for ensuring Board procedures are complied with. The removal from office of the Company Secretary is a matter reserved for the whole Board.
The Board meets, formally, bi-monthly, and additional meetings are arranged as necessary to consider urgent business. The Chairman also meets with the Non-Executive Directors when no Executive Directors are present. The table below summarises the total number of formal Board, Audit Committee, Nomination Committee, Remuneration Committee and Quality Assurance Committee meetings held during the year and the attendance by each Director at those meetings.
| Board | Audit | Nomination | Renumeration | Quality | |
|---|---|---|---|---|---|
| Total number of meetings | 6 | 4 | 4 | 6 | 2 |
| Attendance at meetings | |||||
| Ray Miles | 6 | - | 4 | 6 | - |
| Jamie Buchan (appointed 1 January 2009) | 5 | - | 1 | 5* | - |
| Richard Midmer | 6 | 4* | - | 1* | - |
| Kamma Foulkes | 6 | 3* | - | 1* | 2 |
| Baroness Morgan of Huyton | 6 | 4 | 4 | 6 | 2 |
| Christopher Fisher | 6 | 4 | 4 | 6 | - |
| Nancy Hollendoner | 6 | 4 | 4 | 6 | 2 |
| John Murphy (resigned 30 September 2008) | - | - | - | - | - |
| William Colvin (resigned 8 October 2008) | - | - | - | - | - |
* By invitation
In addition to the above meetings, a number of meetings were held by telephone to deal with urgent business which arose between the formal meeting dates.
On 30 September 2008, John Murphy resigned as Chief Operating Officer.
On 8 October 2008, William Colvin resigned as Chief Executive. At that time Ray Miles temporarily became Executive Chairman until the appointment of the new Chief Executive, on 1 January 2009, when he reverted to his role as Non-Executive Chairman.
On 2 October 2009, the Company announced that Kamma Foulkes planned to retire from the Company with effect from 31 December 2009.
The induction process for new Directors is the responsibility of the Chairman. The process includes industry specific presentations from third parties and management presentations as well as visits to the Group's operations. The process is supported with a Board induction pack which is designed to provide new Directors with background documentation about the Group. It contains information on its history, operations, policies and procedures and details their duties under the Companies Act as well as explaining the additional dealing and disclosure obligations arising from the Company's stock exchange listing. Directors can take independent advice on matters relating to their duties, at the expense of the Company, and have access to the advice and services of the Company Secretary.
The Board considers Baroness Morgan of Huyton, Christopher Fisher and Nancy Hollendoner to be independent Non-Executive Directors. In the view of the Board they are independent of management and free from any relationship, business or otherwise, which could materially interfere with the exercise of their independent judgement.
One third of the Directors are subject to retirement from the Board at the Company's Annual General Meeting. Details of the retiring Directors and of those individuals nominated for office are set out in the Notice calling that Meeting.
Each year, the Board carries out a formal evaluation of its own performance and of individual Directors. The evaluation covers all aspects of Board behaviours and processes including its composition, the performance of its committees, Directors and Secretary and its interaction with its stakeholders. External advisers on corporate governance, Linstock Limited, facilitate the evaluations. This year's evaluation process is underway.
The results of the last evaluation were considered by the Board at its meeting in February. The issues identified included:
The Board considers that it has made significant progress in all these areas in the course of the year.
The Non-Executive Directors, led by the Senior Independent Non-Executive Director, are responsible for evaluating the performance of the Chairman and the Executive Directors. Resources are available to support Directors in addressing any identified training needs that arise out of performance evaluations.
Conflicts of Interest
Under the Companies Act 2006, a Director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the Company's interests. The requirement is very broad and could apply, for example, if a Director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows Directors of public companies to authorise conflicts and potential conflicts where appropriate. The Company's Articles contain provisions which allow the Board to authorise Directors' conflicts of interest. At each Board meeting, Directors are invited to:
Board minutes evidence any conflicts that are authorised.
Committees of the Board
The Board has constituted a number of committees, specifically: Audit, Remuneration, Nomination and Quality Assurance Committees. In addition it has recently formed an Executive Committee. The roles and terms of reference of each committee are summarised below.
Audit Committee
The Audit Committee is comprised of the three independent Non-Executive Directors. Nancy Hollendoner, the committee's chairman, was previously an equity analyst specialising in the healthcare market with the investment bank UBS and is currently a senior adviser on the healthcare market to Hawkpoint Partners Limited. The other members of the Committee are Christopher Fisher and Baroness Morgan of Huyton. In the view of the Board both Nancy Hollendoner and Christopher Fisher bring recent and relevant financial expertise to the committee.
The Committee meets formally at least four times a year and otherwise as required. The External Auditors, Group Finance Director, Group Financial Controller and Head of Internal Audit are invited to attend Audit Committee meetings. At each meeting, an opportunity is given for the Non-Executive Directors and the External Auditors to meet in private.
The Committee has clearly defined terms of reference; these are set out on the Group's website. Its responsibilities include: assisting the Board in the effective discharge of its duties in respect of corporate governance, financial reporting, risk management, and internal control.
The Committee is responsible for making recommendations to the Board in relation to the appointment, reappointment and any matters relating to the resignation or dismissal of the External Auditors as well as the approval of fees for External Auditors. Consideration is given to the desirability of rotating both the audit firm and partner. A new audit partner, from a different office of the External Auditors, was appointed last year and therefore the Committee did not consider further change to be appropriate.
The independence and objectivity of the External Auditors is reviewed by the Audit Committee, with specific consideration given to the level of non-audit fees. Information on non-audit fees is given in note 5 to the consolidated financial statements. In general, non-audit fees paid to the External Auditors are not allowed to exceed the audit fee. The Committee approves each appointment and does not consider the non-audit fees paid to the External Auditors to have affected their independence or objectivity.
The Committee receives an annual independence confirmation from the External Auditors.
The Board, through its Audit Committee, received regular reports from the Internal Audit department. Deloitte LLP provided support to the Internal Audit Department. The work of the department was summarised in its annual report to the Committee. The Audit Committee also receives regular reports from the Group Risk Management Committee on the policies and processes in place to control and mitigate risks. These risks are continually reassessed. The findings of the Internal Audit department and the Committee's assessment of the risks facing the Group were used to create the Group's 2010 internal audit plan which has been agreed by the Audit Committee. The Committee will monitor progress against the plan.
Other work of the Committee included evaluating the performance and effectiveness of both the external and internal audit functions. This year, Lintstock Limited, a corporate advisory firm, assisted with the review of the internal audit function.
The Committee also has responsibility for reviewing the Group's procedures by which employees may, in confidence, raise concerns about improprieties in matters of financial reporting, matters affecting the day-to-day care of residents, or other matters, and for ensuring these arrangements allow for independent investigation and appropriate follow up. In particular, the Committee approved arrangements with two external agencies for telephone ‘hotlines' that staff can use to report concerns.
Remuneration Committee
The composition and role of the Remuneration Committee is described in the remuneration report on pages 42 to 48. Full details of Directors' remuneration and shareholdings are also given in that report.
Nomination Committee
The Nomination Committee comprises Ray Miles, Christopher Fisher, Baroness Morgan of Huyton, Nancy Hollendoner and Jamie Buchan (with effect from the date of his appointment). The chairman of the Committee is Ray Miles. The Committee meets formally at least twice a year and otherwise as required.
The Committee assists the Board in discharging its responsibilities relating to the composition and make up of the Board. It is responsible for evaluating the balance of skills, knowledge and experience on the Board, identifying potential candidates to be appointed as Directors, as the need may arise, and determining succession planning for the Chairman and Chief Executive. During the year the committee met formally, four times.
External advisers were engaged by the committee to assist in the successful selection of the new Chief Executive, who was appointed after an exhaustive search and a rigorous process which matched aptitudes and experience to the person specification for the role, prepared by the Committee with assistance from its advisers.
At its meeting in December 2009 the Committee recommended the reappointment, for a further three-year term, of Ray Miles, Christopher Fisher and Baroness Morgan of Huyton. All three were first appointed immediately prior to the Company's listing on the London Stock Exchange. The Committee's recommendation was made after it had satisfied itself as to each Director's willingness to serve and their past performance.
The Committee's terms of reference are set out on the Group's website.
Quality Assurance Committee
The Quality Assurance Committee assists the Board in its desire to deliver the highest possible quality of care to its residents. The Quality Assurance Committee's responsibilities include monitoring the Group's compliance in relation to the obligations imposed on it by statute and by the various regulatory authorities, assessing the effectiveness of internal quality reporting and of applicable internal controls, identifying any patterns or trends evident from its review of inspection reports received from regulators, monitoring staff turnover, reviewing feedback obtained from internal surveys of residents, regulators and staff and identifying appropriate corrective actions when required.
The Committee comprises Baroness Morgan of Huyton, Nancy Hollendoner and Kamma Foulkes as well as senior management and is chaired by Baroness Morgan. The Committee met twice this year.
The Committee's terms of reference are set out on the Group's website.
Executive Committee
The Board has recently established an Executive Committee. As well as the Executive Directors, the Committee comprises Janette Malham, charged with delivering the Group's New Horizon programme (which is described elsewhere); David Smith, Group Financial Controller; Patricia Williamson, Group Human Resources Director; and the four Regional Directors, namely, Phil Whitaker, Pam Finnis, Michael MacIntosh and Mark Cash. A new Care Director will join the committee when appointed.
Terms of reference for the Committee have been agreed and these are set out on the Group's website. The duties of the Committee include monitoring Group performance in all areas and directing improvements in efficiency, quality, and profitability. The Committee will also monitor and influence Group strategy and be responsible for business planning processes. In summary, its intended role is to support the strategy of the Board and direct the day-to-day business of the Group.
It is intended that meetings are held monthly.
Internal Control and Risk Management
The Board has overall responsibility for the Group's system of internal control and risk management. The system includes an ongoing process for identifying, evaluating and managing significant risks faced by the Group. The process is designed to manage rather than eliminate the risk of failure to achieve business objectives. As with any system of internal control it can only provide reasonable, but not absolute, assurance against material misstatement or loss.
The Board has reviewed the key risks faced by the Group and the effectiveness of the Group's internal control system for the year under review and up to the date of approval of the Annual Report and Accounts.
The Group's Risk Management system is described below.
Risk Management
The Board has put in place a documented organisational structure with clearly defined and understood roles and responsibilities. Documented policies and procedures, at both home and head office level, have been established. The Board remains responsible for the Company's system of internal control and for reviewing its effectiveness. However, it has delegated day-to-day responsibility for risk management to its Group Risk Management Committee (‘GRMC'). The GRMC meets every three months or more frequently if circumstances dictate.
The GRMC is chaired by the Group Finance Director and comprises representatives of the major functions of the Group, namely: Finance, Treasury, Legal, Operations, Human Resources, Estates, Health and Safety, Information Technology and Planning. Each representative is known as a Risk Champion for their own business function.
The GRMC is responsible for setting Group policy and strategy for risk management, identifying, assessing and managing risks facing the Group and communicating, educating and training employees on the risks facing the Group.
The Risk Management Policy provides the framework for managing risk and aims to meet the requirements of good corporate governance. The management of the risks identified in our business, in an appropriate way, is fundamental to our approach.
The following definitions are included within the policy:
Risk: Events that may prevent the achievement of the strategic objectives of the Group;
Risk management: The process of identification and treatment of risks facing the Group so that strategic objectives may be met; and
Risk assessment: The systematic process of analysing risk.
Policy Objectives
Southern Cross is committed to effective risk management;
Reporting
It is the responsibility of the Risk Champions to report risk to the Chairman of the GRMC at each meeting of the Committee. Reports will include findings from the self-audit tools, issues identified by Internal Audit and risks identified as a result of specific incidents that occur unexpectedly in the normal course of business. The GRMC will filter these as appropriate and report to the main Board through the Audit Committee. A Group Risk Register is maintained in respect of all major risks.
Internal Audit
Throughout the year, the Internal Audit Department carried out audits at the homes and also of head office functions. Deloitte LLP were also engaged to carry out audits of head office functions. The results of these audits were reported to the Audit Committee, which communicated any significant concerns to the Board. Operational Management also performed regular audits at home level which considered compliance with regulations and Group policies, health and safety legislation and other operational matters. To help ensure compliance, the Group has a Quality Assurance Department that assists in training operational management on internal compliance techniques and ensures that a uniform approach is adopted across the Group.
Management Information Systems
The Group has a comprehensive management information system for regular and timely reporting into the Board. Every four weeks the financial reporting system produces reports on the results for the year and the period to date, together with key performance indicators (comparing them against budgeted performance); working capital movements; and detailed cash flow information. The management reporting system also includes information on internal, external, regulatory and compliance audits, health and safety and other operational matters. The Board reviews this information at each of its meetings.
Effectiveness of Internal Controls
An assessment is made of the financial, operational, compliance and risk management controls. Internal Audit assisted the Board in its review. In addition to its other work, Internal Audit tested the mitigating controls identified by the GRMC in relation to the Group's key risks in order to give assurance as to their effectiveness. The Committee also required Risk Champions to certify the effectiveness of the controls identified as mitigating the risks they are responsible for.
There were no significant control failures during the year.
The Board confirms that it has reviewed the effectiveness of the system of internal controls, in accordance with the guidance ‘Internal Control: Revised Guidance for Directors on the Combined Code', and is satisfied that the Group complies with that guidance.
Investor Relations
The Board supports the view that effective communications with its shareholders, the ‘sell side' research analysts and the wider investment community is a critical element of corporate governance. The Chairman has overall responsibility for ensuring effective communication with the Group's shareholders and to ensure the Board develops an understanding of the views of major shareholders.
The Group's Annual and Interim Reports are the primary method by which information is communicated to our shareholders. In addition there is also regular dialogue with individual institutional shareholders. In accordance with the EU Transparency Directive the Group issues quarterly Interim Management Statements, and presentations for analysts and institutional shareholders are held after the announcement of interim and preliminary results. These presentations are recorded and can be accessed via the Group's website. All Non-Executive Directors are given the opportunity to attend these meetings and receive copies of any briefings on the Group produced by analysts or brokers. The Chairman and the Senior Independent Director are available to meet with major shareholders at any time and a number of such meetings took place during the year.
The Group's Annual General Meeting is used as an opportunity to communicate with private investors and to give all ordinary Shareholders the opportunity to ask questions of the Directors.
In an effort to communicate more readily with its Shareholders, the Group's website has been developed to incorporate an investor relations section. A profile of the Group, statutory financial statements, all announcements and the corporate calendar are included.
Going Concern
After making enquiries, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue operations for the foreseeable future. For this reason the financial statements continue to be prepared on the going concern basis.
Compliance Statement
The Board confirms that for the year under review the Company has been in compliance with the provisions set out in Section 1 of the 2008 Combined Code, except that during the period 29 September 2008 to 8 October 2008, half the Board was not made up of Non-Executive Directors.
By order of the Board
William McLeish
Company Secretary
8 December 2009