This section and the Remuneration report detail how the Group has applied the principles of good governance contained in the UK Corporate Governance Code (September 2012).
The Group has complied with the provisions of the UK Corporate Governance Code throughout 2013 and to the date of this document. The Group also achieved full compliance with the requirements of section 404 of the Sarbanes-Oxley Act 2002 (US) for the eighth successive year. The Company’s American Depositary Shares are listed on NASDAQ and we are therefore subject to and comply fully with NASDAQ rules, US Securities laws and Securities and Exchange Commission rules to the extent that they apply to foreign private issuers. We explain in the reports below how we applied the provisions and principles of the FCA Listing Rules, the Disclosure and Transparency Rules, and the UK Corporate Governance Code throughout the year.
The Board is collectively responsible for the overall conduct of the Group’s business. The Board’s core activities include:
The Board has a formal schedule of matters specifically reserved for its decision, which include:
The schedule was reviewed in January 2014.
Composition and operation of the Board
At the end of 2013, the Board comprised three executive directors (the Chief Executive Officer, the Chief Financial Officer and the Chief Technology Officer), the Chairman, and six independent non-executive directors. Stuart Chambers was appointed to the Board as Chairman designate on 27 January 2014. Their biographies appear on pages 4 to 5. John Buchanan and Philip Rowley will be retiring from the Board at the 2014 AGM.
The Board is fully aware of the other commitments of the former and current Chairman, and the executive and nonexecutive directors. All directors have completed conflicts of interest questionnaires and any planned changes in their directorships outside the Group are subject to prior approval by the Board. No conflicts of interest arose in 2013 or to date in 2014, and no other situations have been identified that might lead to a conflict of interest. In circumstances where a potential conflict arises, the Board (excluding the director concerned) would consider the situation and either authorise the arrangement in accordance with the Companies Act 2006 and the articles of association or take other appropriate action.
The Board reviewed the independence of the non-executive directors on appointment and continues to do so on an ongoing basis. The independence of the longer serving non-executive directors, Kathleen O’Donovan and Philip Rowley, has been considered. Kathleen O’Donovan, who has now served for seven years, remains highly committed and continues to be regarded as independent. In her capacity as Senior Independent Director and Chairman of the Audit Committee her independence is demonstrated on many occasions each year through her robust approach to questioning management. Philip Rowley, who will be retiring from the Board in May 2014, has demonstrated his independence on many occasions during his tenure in both his interactions with management and shareholders on remuneration matters.
The other non-executive directors have shorter service and are regarded as independent in character, judgement and behaviour, based on both participation and performance at Board and Committee meetings. There are no relationships or circumstances that are likely to affect the judgement of any of them. It is the policy of the Board to review the continued appointment of non-executive directors after six years’ service. Both Sir John Buchanan and Stuart Chambers were regarded as independent at the time of their respective appointments as Chairman and Chairman designate.
Non-executive directors’ expertise
Kathleen O’Donovan has been the Senior Independent Director since January 2011. In this capacity she acts as a sounding board for the Chairman and provides a communication channel between the Chairman and the non-executive directors. She is also available to discuss matters with shareholders, if required. During 2013 and early 2014, she led the Nomination Committee through the process to identify and recommend the recruitment of the new Chairman.
Janice Roberts (who is based in Silicon Valley), Larry Hirst, Andy Green and Eric Meurice all have a broad understanding of the Group’s technology and the practices of major USbased technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds. The beneficial interests of the directors in the share capital of the Company are set out in the Remuneration report.
Board and Committee papers are circulated electronically before each meeting. The business considered at each Board meeting includes the Chief Executive Officer’s report on the status of the business, (incorporating industry and strategic development) and the Chief Financial Officer’s report (incorporating financial, market and investor-related information). On a cyclical basis, Board agendas also include detailed assessments of risk, governance, corporate responsibility, public affairs, performance by division and geographical area, competitive landscape, R&D and organisation/succession planning.
In the event that a director is unable to attend a meeting or participate by conference call, they receive and read the documents for consideration at that meeting, and have the opportunity to relay their comments and, if necessary, to follow up with the Chairman or the Chief Executive Officer after the meeting.
The non-executive directors are encouraged to suggest matters for Board discussions, and in 2013 they were active in contributing to the agenda for the strategy review and ensuring the amount of time spent on strategic and operational issues was appropriately balanced. The independently conducted Board evaluation in 2013 confirmed that the September 2013 strategy meeting was considered to be thorough and informative. An additional strategy meeting has again been scheduled during 2014 and strategy will continue to be covered regularly at Board meetings during the year.
During 2013, the non-executive directors encouraged the executive team to allocate resources to accelerate the development of technology in the Internet of Things arena. A new group was set up in 2013 to focus on the Internet of Things and has been enhanced by the acquisition in July 2013 of Sensinode, which has developed software for connecting wireless low-power, low-cost devices to the internet.
Key senior executives attend Board meetings throughout the year, which gives the nonexecutive directors visibility of executive talent below executive director level, direct information about business developments, and informs them on potential management, succession. In particular, each year the general managers of the divisions present a review of past performance against key objectives and KPIs, and their proposals for the coming year.
During 2013, the Chairman held at least two meetings with the non-executive directors without the executives present, and the non-executive directors met on at least one occasion without the Chairman being present.
The table below shows directors’ attendance at scheduled Board meetings, conference calls and ad hoc meetings which they were eligible to attend during the 2013 financial year.
As previously announced and also explained on page 2, Sir John Buchanan retired as Chairman on 1 March 2014 and will leave the Board at the close of the AGM on 1 May 2014. He is also Chairman of Smith & Nephew plc and the International Chamber of Commerce (UK), and is Senior Independent Director of BHP Billiton plc. He has attended all meetings and conference calls since the date of his appointment and also several induction sessions, meeting members of the executive team and a range of senior managers to increase his knowledge and understanding of the various parts of the business and its operations.
Stuart Chambers joined the Board on 27 January 2014 and took over from Sir John Buchanan as Chairman on 1 March 2014. He is Chairman of Rexam plc and an independent non-executive director of Tesco plc.
The Chairman has primary responsibility for running the Board and the Chief Executive Officer has executive responsibility for the operations and results of the Group, and also for making proposals to the Board in relation to the strategic development of the Group. The Board recognises that the roles of the Chairman and Chief Executive Officer are distinct (as described below) and also the importance of establishing an excellent working relationship between them.
During 2013, there were regular meetings and calls between the Chairman and the Chief Executive Officer outside Board meetings. These discussions provided and continue to provide opportunities for the exchange of information, mentoring and regular updates on the list of priorities that the Board set for the Chief Executive Officer on his appointment. These priorities include: development of the organisation and the next generation of executives, working effectively with the Board, ensuring appropriate strategic decisions are made on investments, employee motivation, and customer focus.
Main responsibilities of the Chairman include:
Chief Executive Officer
Main responsibilities of the Chief Executive Officer include:
Patricia Alsop acts as Secretary to the Board and Board Committees, and all Board members have individual access to her advice. She ensures that the Board receives all relevant information in a timely manner, organises induction and training programmes, and facilitates the Board evaluation in years when this is conducted internally. She is also responsible for ensuring that the correct Board and Committee procedures are followed and advises the Board on corporate governance matters. The established procedure under which directors can, where appropriate, obtain independent legal or other professional advice at the Group’s expense is also administered through her.
Annual report, information and communication with shareholders and other stakeholders
The ultimate responsibility for reviewing and approving the Annual Report and the quarterly earnings releases, and for ensuring that they present a balanced assessment of the Group’s position, lies with the Board.
The Board delegates day-to-day responsibility for managing the Group to the Executive Committee and has a number of other Committees, details of which are set out on the following pages.
The Board makes considerable efforts to establish and maintain good relationships with shareholders and the wider investment community. There is regular dialogue with institutional investors during the year, except during close periods. The main channel of communication continues to be through the Chief Executive Officer, the Chief Financial Officer and the VP of Investor Relations. The Chairman, the Senior Independent Director and the other directors are available to engage in dialogue with major shareholders as appropriate. Beginning in 2012, the Chairman of the Remuneration Committee and the Chairman consulted with shareholders on the terms of the new Long Term Incentive Plan, which was approved at the 2013 AGM. Philip Rowley also consulted with major shareholders over incentive programmes in 2013 and early in 2014.
The Board encourages communication with private investors and part of the Group’s website is dedicated to providing information for all investors, including responses to frequently asked questions, the investment case, product information, press releases, RNS and Securities and Exchange Commission (SEC) announcements, and an interactive online version of the Annual Report.
At present, over 30 sell-side analysts write research reports on the Group and their details appear on the Group’s website. Shareholders can also obtain telephone numbers from the website, enabling them to listen to earnings presentations and audio conference calls with analysts. In addition, webcasts or audiocasts of key presentations are made available through the website.
Members of the Board develop an understanding of the views of major shareholders through any direct contact that may be initiated by shareholders, or through analysts’ and brokers’ briefings. The Board also receives feedback from the Group’s brokers and financial PR advisers, who in turn obtain feedback from analysts and brokers following investor roadshows. All shareholders can register to receive the Group’s press releases via the internet.
The Board actively encourages participation at the AGM, scheduled for 1 May 2014, which is the principal forum for dialogue with private shareholders. The Circular and Notice of AGM are being sent to shareholders concurrently with the distribution of this report, which is well in advance of the required 20 working days before the meeting. A presentation is made outlining recent developments in the business and an open question-and-answer session follows to enable shareholders to ask questions about the business in general. The Chairman, who chairs the Nomination Committee, will be present at the AGM. He will arrange for the respective chairs of the Audit and Remuneration Committees to be available to answer questions and for all directors to attend.
All resolutions proposed at the 2014 AGM will be decided on a poll and the voting results will be published via RNS and the SEC, and will also be available on the Group’s website.
The Board undertakes an annual review of its effectiveness. In order to provide the longest possible period in which to evaluate the performance of the Board following the change of Chief Executive Officer in July 2013, the Board evaluation was deferred until late 2013. This exercise was conducted by an external provider, Independent Audit, who had detailed individual discussions with all members of the Board, four senior executives and the external audit partner. The findings were reported to the Board in January 2014 and were the subject of detailed discussion by the Board in February 2014. Neither the Group nor any individual director has any connection with Independent Audit.
The 2013 evaluation covered:
The overall conclusion was that individual Board members are satisfied that the Board works well and operates effectively in an environment where there is constructive challenge from the non-executive directors. They are also satisfied with the contribution made by their colleagues and that Board Committees operate properly and efficiently. There are a number of areas for further consideration and action in 2014 including:
The non-executive directors will also meet with the Chairman outside Board meetings on a more frequent basis to discuss any issues and concerns, which will provide opportunities for greater sharing of views and understanding without impacting on the business of Board meetings themselves. An internally facilitated Board evaluation will take place during 2014 and the Board intends to continue with a cycle of external evaluations every three years with internal evaluations in between.
A personalised induction programme is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Group and its activities. In 2013, this included continuation of the programme for Sir John Buchanan and a new programme, which will continue during 2014, for Eric Meurice who joined the Board in July 2013. An induction programme is underway for Stuart Chambers, who was appointed to the Board on 27 January 2014 and took over the Chairman role on 1 March 2014. During the first three months this will include several days with the Chief Executive Officer in Silicon Valley to see the Group’s operations and meet senior executives based there, in addition to a series of individual meetings with Board members, senior executives and external advisers based in the UK.
All members of the Board are encouraged to spend time outside Board meetings with members of the Executive Committee and senior management and a number of individual meetings took place during 2013, which will continue during 2014. All Board members are invited to attend the annual ARM Partner Meeting in the UK, which is the Group’s key customer event of the year and/or the ARM TechCon in the US. Board members are also invited to attend the annual Analyst and Investor Day. These events offer the opportunity to understand more about the business, products, technology development roadmap, customer base and investor perspective.
Board members receive guidance on the regulatory regimes and corporate governance framework that the Group operates under. In particular, during 2013 the Board received an update from the Company Secretary on current governance topics including executive remuneration and Board diversity. The Group has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the Group’s expense.
Terms of Reference
The terms of reference of the Audit, Remuneration and Nomination Committees are published on the Group’s website at www.arm.com.
The Executive Committee is responsible for developing and implementing the strategy approved by the Board. In particular, the Committee is responsible for ensuring that the Group’s budget and forecasts are properly prepared, that targets are met, and for generally managing and developing the business within the overall budget. In addition, the Committee ensures that risks identified through the Operational Planning process, particularly corporate-level risks, are managed and mitigated to the greatest extent possible.
Variations from the budget and changes in strategy require approval from the main Board of the Group. The Executive Committee, which meets monthly, now comprises the Chief Executive Officer, Chief Financial Officer, the Chief Technology Officer, the Chief Operating Officer, the Chief Information Officer, the EVP and President Product Groups, the EVP and President of Commercial and Global Development, the EVP Strategy, the EVP and General Manager Physical Design Group, the General Manager of the Internet of Things business unit, the Chief Marketing Officer, the EVP People, the General Counsel and the Company Secretary. Executive Committee meetings are attended by other senior operational personnel, as appropriate. In recognition of the increasing importance of Asia as both a market and an engineering base, the President of ARM Greater China, who is based in China, was appointed as an Executive Committee observer on 1 January 2014 and now attends all meetings.
Biographies of the members of the Executive Committee appear on the Group’s website at www.arm.com.
The Group has a traditional UK Board structure with a unitary Board comprising the Chairman, executive and non-executive directors. The Audit and Remuneration Committees are made up of independent non-executive directors and they, together with the Nomination Committee, report to the Board. The divisions and functions report to the Executive Committee. The Risk Review Committee reports periodically to the Executive Committee, Audit Committee and the Board. The VP Business Assurance/Head of Internal Audit also has a separate reporting line to the Chairman of the Audit Committee.