Announcements

Corporate Governance

Chairman’s Introduction

As Group Chairman I am reporting on the role and effectiveness of the Board during 2015. This is the first year in respect of which we have reported under the revised version of the UK Governance Code (‘the Code’) as published in September 2014. In June 2015 the Company ceased to be a member of the FTSE 250, following which some restructuring took place and our complement of Non-Executive Directors reduced by one. We have, however, remained in full compliance with the Code throughout the year and now satisfy its requirements as applicable to smaller market capitalisation companies. Notwithstanding this change, the processes and disciplines to which our Board adheres, as well as its generally open and co-operative style have remained unchanged. The Group has faced significant challenges particularly in relation to the market conditions that have led to a significant downturn in our Energy business. I believe that the Board remains well equipped to face these challenges, as well as the other key issues and risks that we face.

Notwithstanding the reduction in our complement, I believe that the Board possesses an appropriate balance of skills and experience drawn from the corporate, City and professional worlds. The Chairmanship of both our Audit and Remuneration Committees has changed during the year, but in each case has brought fresh thought and approach. In particular, the common Chairmanship of our Nomination and Remuneration Committees is assisting with the succession process to which I refer below. All of our Committees operate with independence and with the benefit of professional advice where required and report on a regular basis to the Board as a whole.

Our Nomination Committee led by our Senior Independent Director has continued to develop our succession planning. This is well advanced as far as the Group Board is concerned, but also extends to our next tier of senior management. The revised segment Boards have been in operation throughout 2015.

Dr Phil Williams who heads up our energy business intends to retire by 30 September 2016. Since the acquisition of Hydrosearch in 2003, Phil has spearheaded the dynamic growth of our energy business as well as having Board level responsibility for other activities. RPS owes a very great deal to Phil; his experience and unflappability will be much missed by us all when he finally steps down. I would like to thank Phil publicly for his hard work in developing the RPS energy business over the last twelve years.

During the year the Board has devoted attention to developing our corporate management structure to make it more robust and flexible. Following Phil’s retirement the Chief Executive, Dr Alan Hearne, will take over his Board responsibilities in conjunction with an enlarged Executive Committee which will include the regional business leaders. We believe that this will strengthen Group decision making. As previously reported Alan has indicated his intention to remain in office until at least the end of 2017. I am satisfied that we now have the plans in place to deal with senior management succession in the future.

In recognition of the increasing overlap between the Remuneration and Nomination Committees, we decided to move to a single Chairman of these committees. Robert Miller-Bakewell, the Senior Independent Director, has taken on these roles. This summer we will consult shareholders on the executive remuneration package for 2017 onwards.

During the year we undertook our normal annual performance review. This consisted of a questionnaire encompassing key areas of the effectiveness of our Board and its Committees which our directors completed. Although no major issues arose, one or two detailed areas were identified for attention. As a small market capitalisation company we are no longer required to undertake an externally facilitated review every three years and I anticipate that we will utilise our internal review system again in 2016, when an external review would otherwise have been due.

In line with additional obligations now imposed by the Code, but also as a means to enhance our performance, the Audit Committee and Board have overseen the development and formalisation of the way in which we review and report risks and internal control issues within the Group. These issues have always been on the Board’s agenda but are now considered more regularly and in a more structured manner. We also continue to prioritise health and safety issues and review this topic at every Board meeting.

Robert Miller-Bakewell’s second three year term as a Non-Executive Director will expire in April 2016 and I am pleased to report that he has agreed to serve another three year term. As Senior Independent Director as well as being Chairman of the Nomination and Remuneration Committees, Robert has a key role in the management transition to which I refer above.

In accordance with best practice, all our directors, including myself, offer themselves for re-election at every AGM. As previously announced Andrew Page has informed the Company he is not seeking re-election and will leave the Board at this AGM.

We are a people based business and notwithstanding the challenges we have faced in parts of the Group, our employees continue to respond very well. I am pleased to thank all of them for their important contributions to RPS Group.

 

Brook Land
Chairman

UK Corporate Governance Code

Board Responsibilities

Board Structure

Board Operations

The Board generally meets eight times annually, although additional meetings may be held should circumstances require. The Board agenda gives significant focus to business performance and strategy balanced by consideration of emerging risks and the control environment. Comprehensive papers are circulated well in advance of Board meetings which include general updates and briefings on significant issues from the Chief Executive, the Finance Director and the Company Secretary. These regular reports and other matters of immediate importance are discussed at each meeting. The Company Secretary assists the Chairman in ensuring that Board procedures are followed and advises on matters of Corporate Governance. The services of the Company Secretary are available to Directors generally. Outside of Board meetings the Chairman has regular individual discussions with all Directors.

The Executive Committee, which consists of the three Executive Directors supported by the Company Secretary, meets at least once a month and has overall responsibility for all operational matters within the Group, subject to those matters that remain reserved for the Board. As outlined on page 22, during 2016 the Executive Committee will be enlarged to include the regional business leaders. The minutes of all Executive Committee meetings are circulated to the Non-Executive Directors.

Where Directors have concerns that cannot be resolved regarding the management of the Company or a proposed action, these concerns are recorded in the Board minutes. In accordance with Company policy any concerns expressed by a Director on resignation are provided, in a written statement, to the Chairman for circulation to the Board. No matters of this nature have arisen during the year.

The Company’s Articles of Association contain provisions that allow Directors to authorise conflicts in accordance with the Companies Act 2006. These provisions enable the Directors to authorise a conflict, subject to such terms as they may think fit, which may include exclusion from voting in respect of the relevant issue and exclusion from information and discussion relating to the matter. The procedure approved by the Board for authorising conflicts reminds Directors of the need to consider their duties as Directors and not grant an authorisation unless they believe, in good faith, that this would be likely to promote the success of the Company. A potentially conflicted Director cannot vote on such an authorising resolution or be counted in a quorum for that purpose. Any authority granted may be terminated at any time and the Director is informed of his obligation to inform the Company without delay should there be any change in the nature of the conflict previously authorised. In addition, the Board requires the Nomination Committee to check that any individual it nominates for appointment to the Board is free of any potential conflict of interest. No actual or potential conflicts of interest arose during the year under review.

There is an agreed procedure for Directors to take independent professional advice and training at the Company’s expense. The Company maintains Directors and Officers liability insurance with a current limit of indemnity of £20m.

The Group’s strategy and its business model are described on pages 3 and 4.

Board Performance

The Board undertakes an annual appraisal of its performance. During 2015 directors were asked to complete a review relating to the general operation and effectiveness of the Board and its Committees, following which results were reviewed with the Chairman. No major issues arose. The Non-Executive Directors hold meetings with the Chairman without the Executives present at least twice a year and the Non-Executives, led by the Senior Non-Executive Director, meet on an annual basis to appraise the Chairman’s performance.

On appointment directors receive information on the Company as well as the Board and its procedures. They also meet other members of the Board to be briefed on strategy, financial matters and other key issues. Advice is available from the Company’s solicitors, auditors and brokers if required. During the year updates are provided on key technical issues as required including those relating to corporate governance and corporate social responsibility. Non-Executive Directors periodically undertake visits to operating companies and attend their Board meetings in order to improve their understanding of the issues facing the Group’s businesses.

Communication

The Company attaches great importance to communication with its shareholders and other stakeholders. In addition to regular financial reporting the Group website provides up-to-date information about its organisation, the services it offers and newsworthy subjects. The Company also responds to enquiries from shareholders and others with an interest in the Group.

In addition to presentations of full and half-year results, senior executives led by the Chief Executive hold meetings with the Company’s principal shareholders to discuss the Company’s strategy and performance. The Chairman and Senior Independent Director are also available to discuss issues with major shareholders. An investor relations report is presented at all regular Board meetings to ensure that the Board is kept aware of the views of larger shareholders and the investment community generally.

The Chairman of each of the Board Committees attends the Annual General Meeting and is available to answer questions.

Audit and internal controls

The respective responsibilities of the Directors and the independent auditors in connection with the accounts are explained on pages 20 to 21 and 33 and the statement of the Directors in respect of going concern appears on page 20. The long term viability statement is set out on page 12.

The Board has throughout the year and up to the date of approval of the financial statements had procedures in place as recommended in the guidance in the UK Corporate Governance Code and the supporting document issued by the Financial Reporting Council ‘Guidance on Risk Management , Internal Control and Related Financial and Business Reporting”. The principal risks to which the Group is exposed and the measures to mitigate such risks are described on pages 10 to 12.

The Board is responsible for the Group’s systems of risk management and internal control, which are designed to provide reasonable but not absolute assurance against material misstatement or loss. This subject is kept under ongoing review and the Board receives and considers regular reports relating to the Group’s system of risk management and internal control. In addition a detailed review of the Group’s system of internal control and risk management was undertaken by the Audit Committee during the year, the outcome of which was reported to and discussed with the Board. The Audit Committee and the Board were satisfied that the systems in place remained appropriate and effective.

The key procedures that the Directors have established to provide effective internal financial controls are as follows:

Financial reporting: The results for the Group are reported to and reviewed at each Board meeting. A detailed formal budgeting process for all Group businesses culminates in an annual Group budget which is approved by the Board.

Financial and accounting principles and internal financial controls assurance: The Group’s accounting policies, principles and minimum standards required for effective financial control are communicated to all accounting teams. The Group Finance function undertakes periodic detailed reviews at key centres within the Group to ensure that policies and procedures are being followed as well as to identify any control weaknesses or failings.

Capital investment: The Group has clearly defined guidelines for capital expenditure. These include detailed appraisal and review procedures as well as due diligence procedures in respect of potential business acquisitions.

Treasury: the Group operates a central treasury function that undertakes required borrowing and foreign exchange transactions as well as the daily monitoring of bank balances and cash receipts. Appropriate payment authorisation processes are in place in all parts of the Group.

Delegated Authorities: A system of delegated authorities, whereby the incurring of expenditure and assumption of contractual commitment can only be approved by specified individuals and within pre-defined limits, is in place throughout the Group.

Review and reporting: Internal controls and in particular any failures are reported to and reviewed at Group and operating Board meetings in order that changes to systems can be implemented where required. In addition the Audit Committee maintains a brief to keep the overall systems of internal control under review.

Audit Committee

The Audit Committee comprises two Independent Non-Executive Directors; Andrew Page and Robert Miller-Bakewell. John Bennett and Tracey Graham both ceased to be Committee members upon leaving the Group. The Committee has written terms of reference which are available on the Company’s website and on request from the Company Secretary. Although the Board considers that both members of the Committee have experience that is relevant to the role, during the year under review Andrew Page, who is a Chartered Accountant, was the member of the Committee specifically identified as having recent and relevant financial experience.

At its annual planning meeting in September the Committee reviews and approves plans with the Auditors including the locations to be audited as well as the scope and key areas of audit focus. At the conclusion of the audit the Committee reviews the integrity of the Group’s financial statements and the report and accounts as a whole prior to their submission to the Board. This review includes ensuring that statutory and associated legal and regulatory requirements are met as well as considering significant reporting judgements, the adoption of appropriate accounting policies and practices and compliance with accounting standards. In respect of the year under review the Committee considered the following significant issues in relation to the financial statements and in each case addressed these as indicated.

Intangible assets: This category of assets, which comprises goodwill and other intangible assets is by far the largest on the Group balance sheet. It therefore receives careful attention from the Committee which needs to be satisfied that its carrying value is appropriate. As part of its year end procedures the Group Finance function performed a detailed impairment review of other intangible assets based upon approved targets. A number of businesses that hold other intangible assets have been affected by the downturn in oil and gas markets which has in turn reduced their prospects. This review indicated that impairments totalling £20.0m were necessary. The Audit Committee considered papers prepared by the Group Finance Director that included details of the testing undertaken and the assumptions used. The Committee agreed that it was appropriate to provide this impairment charge. The Audit Committee also received reports from the Group Finance Director on the appropriateness of cash generating units for the purposes of goodwill impairment testing and on the goodwill impairment testing undertaken. The modelling performed was based on approved targets and indicated that no impairment of goodwill was required. The report explained the cash flow modelling undertaken, the assumptions used and the conclusions reached. The Committee agreed that no impairment of goodwill was necessary.

Acquisition accounting: A number of acquisitions were completed in the year and judgements are made with respect to the fair value of the net assets acquired and the consideration transferred. The Group Finance Director presented the valuation process and judgements made to the Committee. The valuation of intangibles uses a spreadsheet model that was constructed with the help of external valuation experts. Inputs to the model are obtained from the acquired entity and the assumptions used are derived from recognised sources or using previous experience.

Recoverability of trade debtors and accrued Income: The risk that trade debtors and accrued income may not be collected and therefore may be overstated in the accounts is considered by the Board at its regular meetings when it reviews business performance. The reports prepared for those meetings contain age profile information on debtors and accrued income by segment and consider specific issues in more detail as necessary. During the second half of the year in particular it became apparent that certain Energy clients were missing payment promises and that exposure to them was increasing. The Group Finance Director prepared a paper for the Audit Committee in September that considered the recoverability of trade debtors and accrued income. No provision was considered appropriate at that time, although the difficulty of collecting from some clients was noted. The situation did not improve by the year-end or thereafter. Following the year-end The Group Finance Director prepared reports for the Board and Audit Committee that considered the recoverability of trade debtors and accrued income at the year-end. The Board and Committee confirmed it appropriate to impair the carrying value of trade debtors in the Energy segment by £7.0m as at the year-end. Attempts to recover the debts will continue.

Following the review conducted by the Audit Committee and its own consideration, the Board was able to conclude that the Report and Accounts for 2015, taken as a whole, is fair, balanced and understandable as well as providing the information necessary for shareholders to assess the Group’s performance, business model and strategy. In reaching this conclusion the Board was satisfied that the Group’s performance across its segments, as well as its business model, strategy and the key risks that it faces are clearly explained in the relevant sections of the Report and Accounts.

The Audit Committee keeps the scope, cost and effectiveness of the external audit under review. The Committee reviews the effectiveness of the annual audit prior to making recommendations as to the annual re-appointment of Auditors. To facilitate this process the Group Finance Director canvasses the views of the Group’s operating companies on the conduct of the audit. He then reports this feedback to the Committee as well as the performance of the Auditors at Group level. Deloitte LLP was appointed as Group Auditors in June 2012 following a tender process. The independence of the external auditor is also reviewed each year and audit partners are rotated at least every five years. The Company’s policy is that Group auditors should remain in office for no more than ten years.

As part of its responsibility to ensure independence and objectivity the Committee has adopted a policy to determine the circumstances in which Auditors may be permitted to undertake tax compliance work for the Group. Under the terms of this policy the provision of certain services are prohibited and include those listed below:

bookkeeping services

preparation of financial statements

design and implementation of financial systems

valuation services

investment advisory, broker and dealing services

general management services

The split between audit and non-audit fees for the year under review appears in note 8 on page 50. Certain limited scope compliance work undertaken by Deloitte LLP during the year was handled by teams that were separate and independent from the external audit team and were led by different senior partners. The Committee was satisfied that appropriate safeguards were in place and that the provision of these additional services by Deloitte LLP did not affect their independence as external auditor. Advisory work is undertaken by other firms.

The Committee also monitors the effectiveness of the Group’s internal financial controls and risk management processes; this included assisting the Board in conducting the review of internal controls described above. In conjunction with this exercise the Committee also reviewed the possible need to establish an internal audit function. In considering this point the Committee was cognisant of the detailed review work undertaken by members of the Group Finance Department whilst visiting various parts of the Group’s operations and that the volume of such work increased during the year. Taking account of this and its general level of confidence in the Group’s systems of internal control it concluded that the establishment of an internal audit department was not appropriate at this time but that this will be kept under regular review.

The Committee also keeps under review the means by which staff may, in confidence, raise concerns about financial improprieties relating to financial reporting, internal control or other matters. The Company’s procedure allows for any such matters to be reported to the Company Secretary who will ensure that they are properly investigated and reported to the Audit Committee and the Board. An individual raising a concern need not disclose their identity and if such identity is disclosed it will not be passed on without the consent of that individual.

Nomination Committee

The Committee meets as required and comprises the Non-executive Chairman, Brook Land and two Independent Non-Executive Directors, Louise Charlton and Robert Miller-Bakewell. At the start of the year Robert Miller-Bakewell assumed the Chairmanship of the Committee in place of Brook Land. The Committee’s key responsibilities include reviewing the Board structure, size and composition as well as evaluating the balance of skills, knowledge and experience which may be required in the future and making recommendations to the Board accordingly. It is also responsible for nominating candidates to the Board when vacancies arise, recommending Directors who are retiring to be put forward for re-election and where appropriate considering any issues relating to the continuation in office of any Director. It has written terms of reference which are available on the Company’s website and on request from the Company Secretary.

The range of skills and experience offered by the current directors is highlighted in the Chairman’s Statement above and the Committee is satisfied with the balance and membership of the current Board. The Committee does, however, remain mindful of the need to ensure its periodic refreshment. The Nomination Committee led by its Chairman who is also Senior Independent Director has responsibility for the succession process referred to in the Chairman’s Introductory Statement on page 22 and has a detailed plan in place to deliver this.

Account is also taken of the need to ensure that the Non-Executive Directors continue to provide the range and balance of skills required. The Committee and the Board recognise the importance of diversity. The Group’s previously announced target is that a minimum of 25% of the members of the Board should be female, although following changes to the structure of the Board during the year this target is not at present being met.

Robert Miller Bakewell’s second three year term will expire in April 2016 and following careful review by the Committee and the Board it was concluded that, subject to shareholder approval, his tenure as Non-Executive Director should be extended for a further three year period.

Remuneration Committee

The membership and activities of the Remuneration Committee are described in the Remuneration Committee Report on pages 28 and 29 together with the accompanying notes on pages 83 to 89.

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