This section and the Remuneration report detail how the Group has applied the principles of good governance contained in the UK Corporate Governance Code 2010. The revisions to the Code published by the Financial Reporting Council in 2012 take effect for financial years beginning on or after 1 October 2012. We are voluntarily reporting on some of these changes in this report and will report fully in our 2013 annual report.
The Group has complied with the provisions of the UK Corporate Governance Code 2010 throughout 2012 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 seventh 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 FSA 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:
Composition and operation of the Board
The UK Corporate Governance Code 2010 requires that at least half of the Board, excluding the Chairman, should comprise independent non-executive directors. The Board currently comprises five executive directors, five independent non-executive directors and the Chairman. The number of executive directors will reduce to four when the Chief Commercial Officer, Mike Inglis, retires on 31 March 2013.
The continuing executive directors are the Chief Executive Officer, the Chief Financial Officer, the President and the Chief Technology Officer all of whom play significant roles in the day-to-day management of the business.
Authority is delegated to various committees that are constituted within written terms of reference and chaired by independent non-executive directors where required by the UK Corporate Governance Code 2010.
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. In order to avoid a potential conflict of interest, Young Sohn stood down from the Board on 31 December 2012 in order to take up an executive position outside the Group. No conflicts of interest arose in 2012 or to date in 2013 and no other situations were or have since been identified that might lead to a conflict of interest.
The Board reviews the independence of the non-executive directors on appointment and at appropriate intervals and considers each of the five non-executive directors to be independent in character, judgment and behaviour, based on both participation and performance at Board and committee meetings. There are no relationships or circumstances which are likely to affect the judgment of any of them. The Chairman was regarded as independent at the time of his appointment.
Non-executive directors’ expertise
Kathleen O’Donovan has been the Senior Independent Director since January 2011. The Senior Independent Director provides a communication channel between the Chairman and the non-executive directors and is available to discuss matters with shareholders, if required. During 2012, 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 and Andy Green all have a broad understanding of the Group’s technology and the practices of major US-based technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds. Biographies of the directors appear on pages 59 to 61. The beneficial interests of the directors in the share capital of the Company are set out in the Remuneration report. In the opinion of the Board, Philip Rowley’s modest shareholding does not detract from his independent status.
Before each meeting, the Board is provided with information concerning the state of the business and its performance in a form and of a quality appropriate for it to discharge its duties. The non-executive directors are encouraged to suggest matters for Board discussions and in 2012 they were active in contributing to the agenda for the strategic review and ensuring the amount of time spent on strategic and operational issues was appropriately balanced. Through this process, an additional strategy meeting has been scheduled during 2013.
Key senior executives attend Board meetings throughout the year which gives the non-executive directors greater visibility of executive talent and potential management succession.
In the event that directors are unable to attend a meeting or a 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.
During 2012, the retiring Chairman and the new Chairman both held 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 and conference calls or ad hoc meetings which they were eligible to attend during the 2012 financial year:
The Chairman 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 has attended 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. He also participated with the Chairman of the Remuneration Committee in some meetings and discussions with major shareholders over the proposed new Long Term Incentive Plan, details of which are set out in the Remuneration report and the Circular to shareholders. Further induction sessions are planned for 2013.
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 for making proposals to the Board in relation to the strategic development of the Group. There are clear and documented divisions of accountability and responsibility for the roles of Chairman and Chief Executive Officer.
Main responsibilities of the Chairman include:
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 accounts 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 other than 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. During 2012 the Chairman of the Remuneration Committee and the Chairman consulted with shareholders on the terms of the proposed new Long Term Incentive Plan, details of which are set out in the Remuneration report and the Circular to Shareholders.
The Board also encourages communication with private investors and part of the Group’s website is dedicated to providing accurate and timely 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 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 may register to receive the Group’s press releases via the internet.
The Board actively encourages participation at the AGM, scheduled for 2 May 2013, which is the principal forum for dialogue with private shareholders. 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.
All resolutions proposed at the 2013 AGM will be decided on a poll and the voting results will be published via RNS and the SEC and will be available on the Group’s website.
The Board undertakes an annual Board evaluation. During 2012, this exercise was conducted internally using a questionnaire and was facilitated by the Company Secretary. An external evaluation last took place in 2010 and the Board plans to continue with a cycle of external evaluations every three years and internal evaluations in between.
The 2012 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. In response to points raised in the evaluation, there will in 2013 be increased Board time and focus on:
An externally facilitated board evaluation will take place during 2013.
A full, formal 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 2012, this included a programme for the new Chairman and further meetings between the non-executive directors who joined in 2011 and a range of senior employees.
Non-executive directors are encouraged to spend time outside Board meetings with members of the Executive Committee and the management team. All members of the Board are invited to attend the Annual 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 2012 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.
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.
The Committee is also responsible for ensuring that risks identified through the Operational Planning process, particularly corporate level risks are managed and mitigated to the extent possible.
Three Executive Committee observers were appointed from the senior management team in April 2012. Tom Cronk is responsible for the Processor Division, Dipesh Patel is responsible for the Physical IP Division and Pete Hutton is responsible for the Media Processing Business Unit. They became full members of the Committee with effect from 1 January 2013.
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 President, the Chief Commercial Officer, the Chief Technology Officer, the Chief Operating Officer, the EVPs and General Managers of the Processor, Physical IP and System Design Divisions and the Media Processing Business Unit, the EVPs of Regional & Commercial Development, Marketing & Business Development, Strategy, Human Resources, the General Counsel and the Company Secretary. Executive Committee meetings are attended by other senior operational personnel, as appropriate.
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 Group 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.