Corporate governance
Vectura's Board is committed to maintaining high standards of corporate governance and has fully addressed the provisions of the new Combined Code on Corporate Governance issued in July 2003.
Statement of compliance
The Group has been in compliance with the provisions set out in Section 1 of the Code throughout the year, other than in relation to Provision B.1.3 concerning the granting of share options to Non-Executive Directors (NEDs) in a prior year.
It was essential for an emerging pharmaceutical company like Vectura to secure the recruitment and retention of high calibre NEDs with the appropriate experience and international perspective in the context of the Company’s stage of development.
The principles set out in the Combined Code cover four areas: the Board, directors’ remuneration, accountability and audit and shareholder relations. The following sets out how the Board has applied such principles.
The Board
The Code requires every company to be headed by an effective board, which is collectively responsible for its success. As part of its leadership and control of the Company, the Board has an agreed list of items that are specifically reserved for its consideration. These include business strategy, financing arrangements, material acquisitions and divestments, approval of the annual budget, major capital expenditure projects, risk management, treasury policies and establishing and monitoring internal controls. At each meeting, the Board reviews strategy and progress of the Group towards its objectives, particularly in respect of research and development projects, and monitors financial progress against budget.
NEDs are encouraged to meet without the presence of Executive Directors as appropriate.
Division of responsibilities between Chairman and Chief Executive
The Board has shown its commitment to dividing responsibilities for running the Board and running the Company’s business by appointing Jack Cashman as Non-Executive Chairman; by naming Dr John Brown as Senior Independent Director; by establishing an executive management team (Vectura Executive Committee, the “VEC”) under the leadership of the Chief Executive, Dr Chris Blackwell; and by establishing a procedure whereby the VEC reports formally to the Board at each Board meeting.
Board balance
The Code requires a balance of Executive Directors and NEDs (and in particular independent NEDs) such that no individual or small group of individuals can dominate the Board’s decision-taking. A smaller company, such as Vectura, must have at least two independent NEDs. Four of the six current Board members are NEDs. The NEDs come from diverse business backgrounds and each has specific expertise, materially enhancing the judgement and overall performance of the Board. Dr J R Brown is the Non-Executive Director with relevant financial experience.
Independence of NEDs
As explained in the statement of compliance above, in order to assist in securing the recruitment and retention of high calibre NEDs, the Company has historically remunerated NEDs in the form of options to acquire shares in the Company, in addition to fees. The Board has determined that all its NEDs are independent.
The holding of share options by NEDs could be, amongst other things, relevant in determining whether a NED is independent. After detailed consideration, the Board has determined that it does not believe that the holding of share options by its NEDs impacts on their independence in character and judgement. Options granted to NEDs are not subject to any performance conditions and are now exercisable.
Other factors that may reflect on the independence of a NED include any material business relationships with the Company. Dr Richards provides advice to the Company on request on particular scientific and technical matters within his area of expertise. The Board considers that this arrangement does not in any way affect Dr Richards’ independent judgement. Dr Richards is currently a Director and shareholder in PharmaKodex Limited, a company of which Vectura owns 20.4% of the issued share capital and Dr Richards 1.84%. The Directors do not consider that this arrangement compromises his independence because his responsibilities include management of Vectura’s investment in PharmaKodex.
The Board has established a Remuneration Committee, a Nomination Committee and an Audit Committee, whose make-up complies with the requirements of the Code. In accordance with the Smith Guidance on Board Committees, no one other than the Committee Chairman and committee members receive automatic invitations to the meetings. The NED members of the Board each serve on the three Board Committees, as described below. The Board has considered the composition of the Committees and concluded that the independence and objectivity of the individual NEDs is in no way impaired thereby.
The Remuneration Committee
The Code requires that the Remuneration Committee consists of at least two independent NEDs. Dr Foden has chaired the Remuneration Committee since 18 January 2007, its other members being Dr Brown (Chair up to and including 17 January 2007), Mr Cashman and Dr Richards. The Committee has responsibility for making recommendations to the Board on the Company’s policy on the performance evaluation and remuneration of directors and for determining, within agreed terms of reference, specific remuneration packages for each of the directors and members of the Vectura Executive Committee, including pension rights, any compensation payments and the implementation of executive incentive schemes. The Committee plans to meet at least three times a year.
The Nomination Committee
The Nomination
Committee leads the process for Board appointments and makes
recommendations to the Board. The Code recommends that a majority
of members of the Nomination Committee are independent NEDs. Dr
Brown chairs the Nomination Committee and its other members are
Mr Cashman, Dr Foden and Dr Richards. The Nomination
Committee meets at least once a year, or more if necessary, and has
responsibility for considering the size, structure and composition
of the Board, retirements and appointments of additional and
replacement Directors and making appropriate recommendations to the
Board.
The Audit Committee
The Code recommends that the Board should establish an Audit Committee of at least three independent NEDs, one of whom has recent and relevant financial experience. The Company complies with these recommendations. Dr Brown is Chairman of the Committee, the other members being Dr Foden and Dr Richards. In compliance with the Code’s recommendation that the Chairman should not sit on the Audit Committee. Mr Cashman resigned from the Committee upon the appointment of Dr Foden in January 2007. The Audit Committee intends to meet not less than three times a year. The Audit Committee is responsible for making recommendations to the Board on the appointment, reappointment and removal of the external Auditors and assesses annually the qualification, expertise, resources, remuneration and independence of the Auditors, as well as the effectiveness of the audit process.
Any non-audit services that are to be provided by the external auditors are reviewed in order to safeguard Auditor objectivity and independence. The Board can confirm that there have been no significant non-audit services that are considered to have impaired the objectivity and independence of the external Auditors.
The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Code, and on ensuring that an effective system of internal financial controls is maintained. The ultimate responsibility for reviewing and approving the financial statements in the Interim and Annual Reports remains with the Board. Written terms of reference are modelled on the Code provisions and set out the main roles and responsibilities of the Audit Committee. The Audit Committee reports to the Board, identifying any need for action or improvement on any of these terms of reference and making recommendations as to the steps to be taken. The Board reviews the effectiveness of the Audit Committee.
The Audit Committee meets with the external Auditors at least once a year without management present and its Chairman keeps in touch, as required, with the key people involved in the Company’s governance, including the Board Chairman, the Chief Executive, the Chief Financial Officer and the external audit lead partner. All Audit Committee members understand the role of the Audit Committee, its terms of reference, their expected time commitments and have the necessary overview of the Company’s business, financial dynamics and risk.
The Audit Committee reviews arrangements by which staff of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
The Audit Committee reviews the financial integrity of the Group’s financial statements, including relevant corporate governance statements prior to Board submission.
Timeliness and quality of Board information
The Board has sought to ensure that directors are properly briefed to help them make an effective contribution at the meetings by establishing procedures for distributing Board agendas and papers in a timely manner in advance of meetings. The Board has at least six scheduled formal meetings per year (approximately every two months), with additional meetings when circumstances and urgent business dictate.
In addition, the executive directors ensure regular informal contact is maintained with non-executive directors. The Board makes full use of appropriate technology as a means of updating and informing all its members.
Transparency of Board appointments
There are formal, rigorous and transparent procedures for the appointment of new directors to the Board. Short-listed candidates are interviewed by the Chairman of the Board and at least one other member of the Nomination Committee and evaluations of all appropriate candidates are circulated to all members of the Nomination Committee for consideration and approval prior to candidate recommendation to the Board.
Board performance evaluation
Directors are subject to election by shareholders at the first opportunity after their appointment, and to re-election thereafter at intervals of no more than three years. The Board has a process for evaluation of its own performance and that of its committees and individual Directors, including the Chairman. These evaluations are carried out on a regular basis throughout the year. The performance of Dr Foden and Dr Brown, who are being proposed for re-election at the AGM, has been so evaluated and it has been determined that they continue to perform effectively and show full commitment to their roles on the Board. All directors have service agreements with indefinite terms.
Accountability and audit
The Board is required by the Code to present a balanced and understandable assessment of the Group’s position and prospects. In relation to this requirement reference is made to the Statement of Directors’ Responsibilities for preparing financial statements. The independent auditors’ report includes a statement by the auditors about their reporting responsibilities.
Maintenance of a sound system of internal control
The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The Group’s internal controls are regularly reviewed as part of the risk management process. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The concept of reasonable assurance recognises that the cost of a control procedure should not exceed the expected benefits.
Risk assessment review
An ongoing process for identifying, evaluating and managing the significant risks faced by the Group is in place. The effectiveness of the Group’s internal control system has been reviewed by the Board during the year. The Audit Committee’s terms of reference include the review of the Group’s internal financial control systems and it recommends to the Board any improvements required. The Audit Committee considers the need for an internal audit function annually and has concluded that, given the size of the Group’s operations at this time, it is not necessary. The Board carries out reviews of the non-financial control systems.
Key internal controls
The Group’s organisational structure has clearly established responsibilities and lines of accountability. Employees are required to follow clearly laid-out internal procedures and policies appropriate to the business and their position within the business.
The Group endeavours to appoint employees with appropriate skills, knowledge and experience for the roles they undertake.
The Board has
shown its commitment to formal and transparent arrangements for
internal control by, amongst other things, reviewing the
Group’s arrangements for its employees to raise concerns, in
confidence, about possible wrongdoing (formalised in a grievance
procedure and whistle-blowing policies circulated to all
employees).
Documented quality procedures are in place to ensure the maintenance of regulatory compliance. These are subject to periodic review to ensure current standards of quality compliance are maintained. A quality group monitors compliance with Good Laboratory Practice (GLP), Good Clinical Practice (GCP) and Good Manufacturing Practice (GMP) through the implementation of a compliance programme for in-house and contracted-out activities.
The Group has set up a formal Health and Safety Committee, comprising appropriate members of management and other employees, to be responsible for these issues.
The Group has formal procedures to ensure appropriate security of documents and proprietary information.
The Group has reviewed its portfolio of insurance policies with its insurance broker to ensure that the policies are appropriate to the Group’s activities, size and exposures.
A comprehensive budgeting system allows managers to submit detailed budgets, which are reviewed and amended by Executive Directors prior to submission to the Board for approval. At the end of each quarter a forecast is prepared in the same level of detail as the budget. Actual results against budget and forecast, highlighting variances, are prepared for managers and the Board.
Shareholder relations
The Company reports formally to shareholders twice a year by way of the interim and annual reports. Separate announcements of all material events are made as necessary by press releases that are posted on the Company’s website and automatically sent to all shareholders who are Vectura registered website users. These are the main mechanisms by which the Board seeks to present a balanced and understandable assessment of the Company’s position and prospects. All periodic reports and accounts are mailed to shareholders.
Regular communications are maintained with institutional shareholders and, in particular, presentations are given to shareholders when the half- and full-year financial results are announced.
Dr Brown, as Senior Independent Director, is contactable by shareholders through a link on this website. In addition, all NEDs have developed an understanding of the views of shareholders through corporate broker briefings and review of issued analyst notes.
Constructive use of the AGM
The Board seeks to use the AGM (together with other forums) to communicate with investors and encourage their participation by arranging business presentations and inviting shareholder questions. The Chairmen of the Audit, Nomination and Remuneration Committees are present at the AGM to answer questions through the Chairman of the Board.
