The Board is committed to high standards of corporate governance. With one limited exception, the Board considers that the Company has, throughout the year ended June 30, 2011, complied with all relevant provisions of the United Kingdom Financial Reporting Council’s 2010 UK Corporate Governance Code (the “Governance Code”), made available at the Financial Reporting Council’s website (www.frc.org.uk). The Governance Code was adopted in 2010 by the United Kingdom Financial Reporting Council and replaces the 2008 Combined Code on Corporate Governance.
The one exception in which the Board believes the Company is not in strict compliance is in relation to William T Comfort III’s appointment to the Remuneration Committee. Due to the fact that the Governance Code requires all Remuneration Committee members to be independent and due to William T Comfort III’s relationship with a major shareholder, he does not meet the technical definition of independent under the Governance Code’s provisions. The Board otherwise considers William T Comfort III to be independent in character and judgment and does not believe his Governance Code status in any way actually impedes his ability to fulfil his duties on the Remuneration Committee with all due impartiality like any other member.
This Statement explains how the Company has applied the Main and Supporting Principles of Corporate Governance and describes the Company’s general compliance with its provisions.
The Board is currently made up of nine Directors, being the Chairman, who is part-time, two Executive and six Non-Executive Directors. The Chairman is responsible for the running of the Board. The Board considers that the balance of its constitution brings an appropriate balance of experience in judging matters of strategy, performance, resources, investor relations, internal controls and corporate governance, and is collectively responsible for the long term success of the Company.
Greg Lock continued to serve as the Non-Executive Chairman and Wade Loo was appointed as a non-executive director on February 4, 2011. Biographical details of the Directors and the Board Committees on which they sit are set out on pages 18 and 19 (all page number references refer to the company FY2011 Annual report).
Considering the guidance for determining independence as set out in the Governance Code, the Board considers that Chris Conway, Greg Lock, Joe Rose, Mark Wells and Wade Loo were independent throughout the year. As further explained below, the Board considers William T Comfort III to be independent in character and in judgment, but is unable to determine him to be independent according to the Governance Code definition based upon his relationship with a significant shareholder. In addition, and after careful review, the Board has again concluded that Bruce Powell, who has served the Board for 15 years, was independent throughout the year. In coming to this view the Board considered his expertise and independence of judgment and opinion.
During the year ended June 30, 2011 the Board met on 10 occasions. The attendance of individual Directors at all Board and committee meetings is shown in the following table.
| Board Meetings | Nomination Committee | Remuneration Committee | Audit Committee | |
|---|---|---|---|---|
| No. of meetings in year | 10 | 0 | 5 | 5 |
| Reynolds C. Bish | 10 | - | 5* | 5** |
| James Arnold, Jr. | 10 | - | 4* | 5** |
| Greg Lock | 10 | - | 5* | 5** |
| Bruce Powell | 10 | - | 5* | 5 |
| Chris Conway | 9 | - | 5 | 5 |
| Mark Wells | 9 | - | 5 | 5 |
| William T Comfort III | 10 | - | 5 | - |
| Joe Rose | 10 | - | 5 | 5** |
| Wade Loo (appointed on February 4, 2011) |
5 | - | 2* | 2 |
*At the express request of the Remuneration Committee
**At the express request of the Audit Committee.
During the year the Chairman and Non-Executive Directors regularly met without the Executive Directors present. In addition, the Chief Executive Officer met with just the Non-Executive Directors and the Chairman on a regular basis.
Director | Position | Main Board | Audit Committee | Remuneration Committee | Nomination Committee |
|---|---|---|---|---|---|
| Reynolds C. Bish | Chief Executive Officer | Member | - | - | - |
| James Arnold, Jr. | Chief Financial Officer | Member | - | - | - |
| Greg Lock | Non-Executive Chairman | Chairman | - | - | Chairman |
| Bruce Powell | Non-Executive Director and Senior Independent Director | Member | Chairman | - | Member |
| Chris Conway | Non-Executive Director | Member | Member | Chairman | Member |
| Mark Wells | Non-Executive Director | Member | Member | Member | Member |
| William T Comfort III | Non-Executive Director | Member | - | Member | Member |
| Joe Rose | Non-Executive Director | Member | - | Member | Member |
| Wade Loo | Non-Executive Director | Member | Member | - | - |
There is a formal schedule of matters reserved for the Board’s consideration. These include among other things:
The Directors may, at the Company’s expense, take independent professional advice and receive training on appointment and subsequently as they see fit. In addition, all Directors have access to the advice and services of the Company Secretary, the appointment and removal of whom is a matter for the whole Board. The Secretary advises the Chairman and the Board on appropriate procedures for the management of its meetings and duties (and the meetings of the Company’s principal Committees), as well as the implementation of Corporate Governance and compliance within the Company.
Prior to appointment, prospective Directors usually participate as observers to the Board. This allows the individual and the existing Directors to get to know each other prior to appointment. On appointment, the Directors take part in an induction program. They receive information about the Company, the role of the Board, matters reserved to the Board, terms of reference and membership of principal Board and management Committees, the powers delegated to Committees, the Company’s Corporate Governance practices and procedures, and the latest financial information on the Company. This is supplemented by visits to key Company locations and meetings with key senior executives. Throughout their period in office, the Directors are continually updated on Company business and the competitive environment in which it operates, technology matters and other changes affecting the Company. Directors are also advised on appointment of their legal and other duties, responsibilities and obligations as a Director of a listed company, both in writing and in face-to face meetings with the Company’s solicitors.
Any Director appointed by the Board during the year is required, under the provisions of the Company’s Articles of Association, to retire and seek re-election by shareholders at the next Annual General Meeting (AGM). The Articles also require one-third of the Board to retire by rotation each year. All Directors are required to offer themselves for re-election at least every three years. Provision B.7.1 of the Governance Code requires all directors of FTSE 350 companies to be subject to annual election by shareholders. The Board has agreed that all directors, whether or not required by the Articles to seek re-election at the 2011 AGM, will be subject to re-election at the 2011 AGM.
There is a clear division of responsibilities between the Chairman and the Chief Executive Officer which has been approved by the Board. The Chairman is responsible for leadership of the Board, ensuring its effectiveness in all aspects of its role and setting its agenda. He facilitates both the contribution of the Non-Executive Directors and constructive relations between the Executive and Non-Executive Directors. He ensures that the Chief Executive Officer develops a strategy with which the Board as a whole is comfortable. The Chief Executive Officer is responsible for formulating strategy and for ensuring its delivery once agreed upon by the Board. He creates a framework of strategy, values, organisation and objectives to ensure the successful delivery of results, allocating decision making and responsibility to support this. In doing so, he works with the executive management team, which comprises the Executive Directors and certain other senior executives.
This separation of responsibilities, together with the ratio of Board membership between Executive and Non-Executive Directors, ensures there is a balance of power and authority at the head of the Company. The views of all Directors are taken into account in the decision-making process.
To enable the Board to function effectively and assist Directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of Board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. Senior executives are regularly invited to Board meetings and make business presentations. The Board also discusses which decisions can be delegated to senior management within the Company, such as decisions needing to be made by senior management on a day-to-day basis for the Company’s on-going and effective operation, including but not limited to lower level employee hiring and termination decisions, and financial expenditures falling within already approved budget levels which have not been designated as decisions expressly reserved to the Board.
During the year the Board used a structured evaluation process to assess and improve its performance. This included collective feedback and discussion of the results and agreement on areas of improvement. Each Board member was individually assessed as was the performance of the Board as a whole and of its Committees. The Non-Executive Directors, led by the Chairman of the Audit Committee, conducted a review of the performance of the Chairman and this was discussed subsequently with him. In all cases the objectives were to address areas needing improvement. The non-executive directors to be re-elected are considered to have performed effectively and demonstrated commitment to the role.
The Board has delegated certain responsibilities to Board Committees, which operate within clearly defined terms of reference, reporting regularly to the Board. These are as follows:
The Audit Committee assists the Board in reviewing the reporting of financial and non-financial information to shareholders, the system of internal control and risk management, and the audit process. The Committee comprises four Non-Executive Directors, chaired by Bruce Powell, who has recent relevant experience as CFO of ApaTech Ltd., and meets formally at least four times a year. The Committee met 5 times during the year ended June 30, 2011, with no Committee members missing any meetings. The Chief Executive Officer, Chief Financial Officer and external auditors attended these meetings as required by the Committee.
The purpose of the Audit Committee is to assist the Board in the discharge of its responsibilities for financial reporting and corporate control and to provide a forum for reporting by the external auditors. The responsibilities of the Committee include:
During the year the Committee undertook the following activities at these meetings:
The Audit Committee reviewed the nature and amount of non-audit work undertaken by Ernst & Young LLP (EY) in the current year, this being the fifth year with EY as auditors, to satisfy itself that there remains no impact on their independence. In some cases the nature of the advice may make it more timely and cost-effective to select EY, which has already developed a good understanding of the Company. Details of this year’s fees are given in [note 6] to the Financial Statements. EY is also subject to professional standards which safeguard the integrity of the auditing role it performs on behalf of the shareholders. There is a formal policy in place for the provision of non-audit services by the auditors. This policy prohibits the provision of certain services, such as any service requiring an external auditor to make management decisions on behalf of the Company, any services creating mutuality of interest and any services in which the external auditor would be required to audit their own work. The policy requires that other services are subject to prior approval, such as services for which the cost is beyond the agreed-upon monetary threshold.
The Remuneration Committee comprises four Non-Executive Directors, is chaired by Chris Conway and meets formally at least three times a year. It met 5 times during the year ended June 30, 2011, with no Committee members missing any meetings.
Under provision D.2.1 of the Governance Code, the Board is required to establish a Remuneration Committee of independent Non-Executive Directors. Three out of four of the members of the Remuneration Committee throughout the financial year were determined independent according to the Governance Code definition of independence. The Board considers the other, William T Comfort III, to be independent in character and judgment, but has historically considered itself unable to determine him to be independent according to the Governance Code definition. This is due to his technically falling within merely one of seven criteria in the Governance Code said to indicate a potential impediment to independence: his relationship with a significant shareholder. Notwithstanding his membership in the Remuneration Committee therefore resulting in technical non-compliance with a single provision of the Governance Code throughout the financial year, the Board does not consider his Governance Code status in any way actually to impede his ability to fulfil his duties on that committee with all due impartiality like any other member. The Board feels that his extensive experience in investing in the public markets makes him a valuable contributor to the work of the committee, notwithstanding this purely technical non-compliance.
Further details about the Remuneration Committee are included in the Remuneration Report.
The Nomination Committee keeps under review the Board structure, size and composition; proposes to the Board suitable candidates for appointment as Directors of the Company; and considers Board succession plans including diversity. The Committee comprises six Non-Executive Directors, is chaired by Greg Lock and meets as required. No separate Nomination committee meetings were held during the year, as the Board as a whole decided to review and interview potential candidates for what eventually led to the appointment of Wade Loo to the Board and Audit Committee. In the current financial year, recommendations for a new board candidate were obtained by Kofax’s Chief Financial Officer who were then interviewed by the Executive Directors and the top two candidates by the Board. Wade Loo was known to Kofax’s Chief Financial Officer having been introduced by a finance colleague in 2009. Following the interview process, Wade Loo was selected by the Board based upon his level of relevant experience and credentials. In this case, the Board was satisfied with the number of qualified candidates presented for consideration, without the engagement of an executive search consultancy firm.
The Company is committed to maintaining good communications across its entire shareholder base, whether institutional investors, private or employee shareholders. This is achieved principally through annual and half-yearly financial reports and other trading statements, as well as via the Annual General Meeting. Normal shareholder contact is the responsibility of the Chief Executive Officer, the Chief Financial Officer and the Company’s investor relations department.
The Chairman is available to discuss matters with institutional shareholders where it would be inappropriate for those discussions to take place with either the Chief Executive Officer or the Chief Financial Officer.
Regular dialogue and presentations take place throughout the year with institutional investors and buy-side and sell-side analysts. Shareholders have the opportunity to meet and question the Board at the Annual General Meeting, which will be held in London on November 3, 2011. The Company seeks to ensure that the Chairmen of the Audit, Remuneration and Nomination Committees are available to answer questions. The results of proxy voting will be disclosed at the meeting after the shareholders have voted on each resolution by a show of hands.
In addition, the Board receives reports from the Company’s broker and investor relations agency several times a year that communicate feedback from institutional shareholders and analysts.
The Company’s web site at www.kofax.com contains both corporate and customer information, updated on a regular basis.
The Board has overall responsibility for the Company’s approach to assessing risk and the systems of internal control, and has delegated the process of reviewing its effectiveness to the Audit Committee, which reports back to the Board. This includes financial, operational and compliance controls and risk management procedures. The role of executive management is to implement the Board’s policies on risk and control, and present assurance of compliance with these policies. This process, regularly reviewed by the Directors, is carried out in conjunction with business planning by the executive management team.
Because of the limitations that are inherent in any system of internal control, this system is designed to manage rather than eliminate the risk of failure to achieve the Company’s business objectives. Accordingly, it can only provide reasonable but not absolute assurance against material misstatement or loss.
The Board has established an on-going process for identifying, evaluating and managing the significant risks faced by the Company. This process, which is regularly reviewed by the Board and accords with the Turnbull guidance, was in place throughout the year under review and has continued up to the date of approval of these accounts. A key control procedure is the day-to-day involvement of executive members of the Board and Company management in all aspects of the business and their attendance at regular management meetings at which performance against plan and business prospects are reviewed.
While the Board maintains full control and direction over appropriate strategic, financial, organisational and compliance issues, it has delegated to executive management the implementation of the systems of internal control within an established framework.
The Board has put in place an organizational structure with formally defined lines of responsibilities and delegation of authority. There are also established procedures for planning, capital expenditure, information and reporting systems, and for monitoring the Company’s business and performance.
Other key features and the processes for reviewing the effectiveness of the internal control system are described below:
The Board, with the assistance of the Audit Committee, has conducted its annual review of the effectiveness of the systems of internal control based on a review of significant risks identified, the results of external audits and reports from management. The key processes applied in doing so are described on pages [30 to 31]. The associated companies are not considered to be significant for group purposes and therefore are not part of the internal control system.
The Audit Committee evaluates the results of formal risk assessments by management and reviews the implementation of policies and procedures documents. Policies and procedures documents are incorporated in a structured Business Conduct Guidelines (BCG) framework at Kofax and are designed to facilitate reliable financial reporting, operating efficiency and compliance with laws and regulations. During the financial year 2011, the Audit Committee reviewed various Business Conduct Guidelines, and updates to the Code of Ethics.
The Directors have considered compliance with DTR 7.2.5 and DTR 7.2.6 within the Directors’ Report.
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review on pages [2 to 11]. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Chief Financial Officer’s Review on pages 7 to 11 of the Company’s 2011 Annual Report. In addition [note 26] to the Financial Statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.
The Group has considerable financial resources together with long-term contracts with a number of resellers, customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making enquiries, the Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Financial Statements.
By order of the Board
Bradford Weller
Company Secretary
October 3, 2011