statement of compliance with the combined code

 The Company believes in high standards of corporate governance and the Board is accountable to shareholders for the Group’s performance in this area. This statement describes how the Group is applying the relevant principles of governance, as set out in the Combined Code of Corporate Governance (“the Code”) which is available on the website of the Financial Reporting Council (‘FRC’). The Company is applying the June 2008 version of the Code on a voluntary basis for the financial year commencing 1 October 2008.

 

The Company is a smaller company for the purposes of the Code and in consequence certain provisions of the Code either do not apply to the Company or may be judged to be disproportionate or less relevant in its case.

 

The Company has complied throughout the year with the applicable provisions of the Combined Code other than as explained in this report. This statement will address separately three main subject areas of the Code namely the Board, Relations with Shareholders and Accountability and Audit. Directors’ remuneration is dealt with in the Remuneration Report.

 

The Board confirms that it has been applying the procedures necessary to implement the Turnbull Guidance on how to apply the section of the Code dealing with internal control.

The Board

The Board of Avon Rubber p.l.c. currently comprises a Chairman, two independent Non-Executive Directors ('the Non-Executive Directors'), and two Executive Directors who are the Chief Executive and the Group Finance Director. All Directors submit themselves for re-election at regular intervals of not more than three years and are subject to re-election at their first Annual General Meeting after appointment. Additionally, the Non-Executive Directors are appointed by the Board for specific terms and reappointment is not automatic. Non-Executive Directors submit themselves for annual re-election if they have served for more than 9 years since first election.

 

Biographies of the directors are available here. These illustrate the range of business and financial experience which the Board is able to call upon. The intention of the Board is that its membership should be well balanced between executives and non-executives and have the appropriate skills and experience. The special position and role of the Chairman under the Code is recognised by the Board and a written statement of the division of responsibilities of the Chairman and Chief Executive has been agreed by the Board. The Chairman is responsible for the leadership of the Board and the Chief Executive manages the Group and has the prime role, with the assistance of the Board, in developing and implementing business strategy.

 

One of the roles of the Non-Executive Directors under the leadership of the Chairman is to undertake detailed examination and discussion of strategies proposed by the Executive Directors, so as to ensure that decisions are in the best long-term interests of shareholders and take proper account of the interests of the Group’s other stakeholders. The Chairman ensures that meetings of Non-Executive Directors without the Executive Directors are held.

An annual performance evaluation was undertaken by the Board during the year. The Chairman acted as the sponsor of the evaluation process and each Director was required to score a questionnaire for review by the Board and appropriate Committees. The Company Secretary acted as facilitator to the Board and issues arising from the process were incorporated into the Board’s business as appropriate. Within the evaluation exercise, the Board addressed three key areas; the extent to which the Board focuses on the right issues, interacts effectively and has the right mechanics in place.

 

The Chairman ensures through the Company Secretary that the Board agenda and all relevant information is provided to the Board sufficiently in advance of meetings. The Chief Executive and the Company Secretary discuss the agenda ahead of every meeting. At meetings the Chairman ensures that all Directors are able to make an effective contribution throughout meetings and every Director is encouraged to participate and provide opinions for each agenda item. The Chairman always seeks to achieve unanimous decisions of the Board following due discussion of agenda items.  The Non-Executive Directors fully review the Group’s operational performance and the Board as a whole has, with a view to reinforcing its oversight and control, reserved a list of powers solely to itself which are not to be delegated to management. This list is regularly reviewed and updated and includes appropriate strategic, financial, organisational and compliance issues, embracing the approval of high level announcements, circulars and the report and accounts and certain strategy and management issues.  Examples of strategy and management issues include the approval of the annual operating budget and the three year plan; the extension of the Group’s activities into new business and geographic areas (or their cessation); changes to the corporate or capital structure; financial issues, including changes in accounting policy, the approval of dividends, bank facilities and guarantees; changes to the constitution of the Board; and the approval of significant contracts, for example the acquisition or disposal of assets worth more than £250,000 or the exposure of the Company or the Group to a risk greater than £250,000.

 

All Directors have full and timely access to all relevant information and the Board meets regularly with appropriate contact between meetings. All Directors receive an induction on joining the Board. When appointed, Non-Executive Directors are made aware of and acknowledge their ability to meet the time commitments necessary to fulfil their Board and Committee duties. Procedures are in place, which have been agreed by the Board, for Directors, where necessary in the furtherance of their duties, to take independent professional advice at the Company’s expense and all Directors have access to the Company Secretary. The Company Secretary is responsible to the Board for ensuring that all Board procedures are complied with. The removal of the Company Secretary is a decision for the Board as a whole. 

 

Of particular importance in a governance context are three committees of the Board, namely the Remuneration Committee, the Nominations Committee and the Audit Committee. The members of the Committees comprise the Chairman and all the Non-Executive Directors. The Non-Executive Directors regard the Chairman as adding significant value to the deliberations of the Audit Committee and his membership is now ratified by Provision C.3.1. of the Code, which permits listed companies outside the FTSE 350 to allow the chairman to sit on the audit committee where he or she was considered independent on appointment.  Mrs. S.J. Pirie remains Chairman of the Audit Committee and Senior Independent Non-Executive Director. The Board is satisfied that Mrs. Pirie has recent relevant financial experience and her profile can be viewed here. Sir Richard Needham chairs the Nominations Committee. Mr. D.R. Evans remains Chairman of the Remuneration Committee.

 

The Remuneration Committee’s principal responsibilities are to decide on remuneration policy on behalf of the Board and to determine remuneration packages and other terms and conditions of employment, including appropriate performance related benefits, for Executive Directors and other senior executives. The Chief Executive and the Company Secretary attend meetings of the Committee by invitation, but are absent when issues relating to each of them are discussed.

 

The Nominations Committee, to which the Chief Executive is normally invited, reviews the Board structure, leads the process for Board appointments and makes recommendations to the Board, including on Board succession planning. The Nominations Committee evaluates the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepares a description of the role for new appointments. In identifying potential candidates for positions as Non-Executive directors, the Committee has full regard to the principles of the Code regarding the independence of Non-Executive directors. The Committee did not meet during the year.

 

The Audit Committee meets at least three times a year. The meetings are also attended by the Executive Directors and usually by representatives of the Group’s external auditors. At meetings attended by the external auditors time is allowed for the Audit Committee to discuss issues with the external auditors with no Executive Directors present. An annual rolling Agenda is reviewed to ensure that all matters within the Audit Committee’s Terms of Reference during the year are appropriately covered. As well as reviewing draft preliminary and interim statements, the Committee reviews significant financial reporting judgements contained in formal announcements by the Company.

 

The Committee also considers external and internal audit reports and monitors all services provided by, and fees payable to, the external auditors to ensure that potential conflicts of interest are considered and that an objective and professional relationship is maintained.

 

The Committee reviews and monitors the independence and objectivity of the external auditors and the effectiveness of the audit process. The Committee also keeps under review the nature, extent, objectivity and cost of non-audit services provided by the external auditors.

 

In order to ensure the independence and objectivity of the external auditors the committee maintains and regularly reviews its Auditor Independence Policy. This policy provides clear definitions of services that the external auditors can and cannot provide. They may only provide non-audit services where those services do not conflict with their independence, for example tax compliance work. A formal authorisation policy is in place for the provision of non audit services to ensure that appropriate pre-approval is obtained as necessary. The policy also establishes guidelines for the recruitment of employees or former employees of the external auditor. To ensure compliance with this policy the Audit Committee carried out a review during the year of the remuneration received by PricewaterhouseCoopers LLP for audit services, audit-related services and non audit work. These reviews ensure a balance of objectivity, value for money and compliance with this policy.The outcome of these reviews was that no conflicts of interest existed between such audit and non-audit work.

 

As part of its work, and in line with its terms of reference, the Committee particularly considers the discharge of the Board’s responsibilities in the areas of corporate governance, financial reporting and internal control, including the internal management of risk, as identified in the Turnbull Guidance.

Meetings during the year ended 30 September 2009

	Board	Audit Committee	Remuneration Committee	Nominations Committee
S.J. Pirie	9	3	5	-
Sir Richard Needham	9	3	5	-
D.R. Evans	8	2	5	-
P.C. Slabbert	9	3*	5*	-
A.G. Lewis	9	3*	-	-

*Attendance by invitation.

The Board schedules 8 or 9 regular meetings per year. This year 8 further meetings have been held on an ad hoc basis, including by telephone conference, for example in connection with amendments to the banking facilities and disposals. In addition, between them, the three Non-Executive Directors visited most of the Group’s US facilities accompanied by the Chief Executive or the Group Finance Director to meet management at these sites and receive presentations from them.

 

Copies of the terms of reference of the Nominations, Remuneration and Audit Committees and the terms and conditions of appointment of the Non-Executive Directors are available on the Company’s website or from the Company Secretary.

 

Relations with shareholders

The Directors regard communications with shareholders as extremely important. All members of the Board receive copies of analysts’ reports of which the Company is made aware. In terms of published materials the Company issues a detailed annual report and accounts and, at the half year, an interim report. Further to the Transparency Directive, which has been implemented by the FSA through amendments to the Listing and Disclosure Rules, interim management statements have been issued during the year, together with a number of other event updates. Dialogue takes place regularly with institutional shareholders and general presentations are given following the preliminary and interim results. The Board receives comments from analyst meetings and shareholder meetings after both interim and final results and other updates from its corporate advisers. Shareholders have the opportunity to ask questions at the annual general meeting and also have the opportunity to leave written questions for the responses of the Directors. The Directors meet informally with shareholders after the annual general meeting and respond throughout the year to correspondence from individual shareholders on a wide range of issues.  Annual general meetings provide a venue for the shareholders to meet the Non-Executive Directors in addition to any other meetings shareholders may request.

The Non-Executive Directors, having considered the Code with regard to relations with shareholders, are of the view that it is most appropriate for the shareholders to have regular dialogue with the Executive Directors. However, should shareholders have concerns, which they feel cannot be resolved through normal shareholder meetings, the Chairman, Senior Independent Non-Executive Director and the other Non-Executive Director may be contacted upon request through the Company Secretary.

 

At the annual general meeting on 2 March 2010, the Board will be following the recommendations in the Code regarding the constructive use of annual general meetings; as usual, the agenda will include a presentation by the Chief Executive on aspects of the Group’s business.

 

Accountability and audit

The Combined Code requires that Directors review the effectiveness of the Group’s system of internal controls. The scope of this review covers all controls including financial, operational and compliance controls as well as risk management. As indicated earlier, the Board has put in place the procedures necessary to implement the Turnbull Guidance on internal control and the Audit Committee has responsibility to review, monitor and make policy and recommendations to the Board upon all such matters.

 

The Directors acknowledge their responsibility for the Group’s system of internal control. The Board keeps this system under continuous review and formally considers its content and its effectiveness on an annual basis. Such a system can provide only reasonable, and not absolute, assurance against material misstatements or losses. The following paragraphs describe relevant key procedures within the Group’s systems of internal control and the process by which the Directors have reviewed their effectiveness.

 

Systems exist throughout the Group which provide for the creation of three year plans and annual budgets; monthly reports enable the Board to compare performance against budget and to take action where appropriate.

 

An internal audit process is undertaken by members of the finance team who conduct financial reviews of each of the sites on a quarterly basis and through an annual site visit. In addition, site controllers and plant managers are obliged to positively confirm, on a bi-annual basis, that the controls as documented in the Internal Control Manual are in place and are being adhered to, with specific reference to key controls such as bank and control account reconciliations. This process has been reviewed by the Board and continues to be monitored by the Audit Committee.

Procedures are in place to identify any major business risks and to evaluate their potential impact on the Group. These risks are described within the Business Review. The Board carried out an annual review of the key risks facing the Group during the year and this will move to a quarterly review next year. In the year under review, the risk assessments carried out both at business level and at Board level continued to be reviewed and strengthened as part of the Board’s ongoing response to the Turnbull Guidance.

 

In a change of practice from previous years, risk is now managed by the executive management team at its quarterly meetings, led by the Company Secretary and the Chief Executive. At each meeting the executive team sets its key priorities for successfully managing the Group’s businesses in the coming quarter. This process inherently addresses risk and the Company Secretary sponsors an exercise that ensures the known risks to the businesses, together with any newly identified risks, are assessed and analysed effectively and that the priorities eliminate, minimise, control or transfer risk (or the effect thereof ) as appropriate. The Company Secretary also sponsors a review of the continuing effectiveness of other aspects of the control environment by the executive team at each quarterly meeting.

 

There is a clearly defined delegation of authority from the Board to the business units, with appropriate reporting lines to individual Executive Directors. There are procedures for the authorisation of capital expenditure and investment, together with procedures for post-completion appraisal.

Internal controls are in existence which provide reasonable assurance of the maintenance of proper accounting records and the reliability of financial information used within the business or for publication.

 

The Board has issued a Policy and Code on Business Conduct which reinforces the importance of the internal control framework within the Group. The Policy and Code includes a whistle-blowing procedure whereby individuals may raise concerns in matters of financial reporting or other matters directly with the Audit Committee which will ensure independent investigation and follow up action. The Policy and Code is reviewed annually. The latest version contains material designed to strengthen the Group’s approach to the risk of bribery and corruption by implementing the UK Government’s anticorruption initiative as reflected in the Common Industry Standards prepared by the Defence Manufacturers’ Association and the Society of British Aerospace Companies.

 

Although the Board itself retains the ultimate power and authority in relation to decision making, the Audit Committee meets at least three times a year with management and, on two occasions, external auditors to review specific accounting, reporting and financial control matters. This Committee also reviews the interim, preliminary and annual statements and has primary responsibility for making a recommendation on the appointment, reappointment and removal of external auditors.

 

Going concern

After making appropriate enquiries, the Directors have, at the time of approving the financial statements, formed a judgement that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.

Stella Pirie OBE

Chairman of the Audit Committee

19 January 2010

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