Annual report and financial statements 2008

Accountability and audit

 

The Group’s overriding corporate objective is to maximise long-term shareholder value whilst exceeding the expectations of our customers, employees and partners. In doing so, the directors recognise that creating value is the reward for taking and accepting risk.

 

The Board has overall responsibility for the Group’s approach to assessing risk and systems of internal control, and for monitoring their effectiveness in providing shareholders with a return that is consistent with a responsible assessment and mitigation of risks. This includes reviewing 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 to provide assurance on compliance with these policies. Independent assurance is provided by internal audit, which operates across the Group, and the external auditors. All employees are accountable for operating within these policies.

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 corporate objectives. Accordingly, it can only provide reasonable but not absolute assurance against material misstatement or loss.

Risk assessment

Every six months the Board reviews the Group Risk Profile – the tool that drives risk assessment and action planning. This is supported by an ongoing process for identifying, evaluating and managing the significant risks faced by the Group.

As an integral part of planning and review, managers from each business area and major projects:

  • identify the risks to their plans;
  • evaluate the risks using likelihood and impact; and
  • document the actions being taken to manage those risks.

 

This process has been in place for the year under review and up to the date of approval of the Annual report and accounts. It has been regularly reviewed by the Board and accords with the Internal Control Guidance for directors on the Code produced by the Financial Reporting Council.

 

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Principal risks and uncertainties

There are risks and uncertainties which could impact the Group’s long-term performance. The risk assessment process is designed to identify, manage and mitigate business risk. The table below gives examples of activities across Group functions to mitigate against risks and uncertainties identified. The Board considers that these are the most significant risks to achieving business goals. The risks listed do not comprise all those associated with Marks & Spencer and are not set out in any order of priority. Additional risks and uncertainties not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business.

 

Risk Impact Examples of mitigating activities
PRODUCT: We aim to provide a wide choice of great value, high quality clothing, food and home products, which are all sourced and made responsibly.
Clothing
We fail to maintain clothing market share through growth of space and focus on product in the face of increased competition in tougher trading conditions Adverse effect on
financial results

Lost market share
and customer loyalty
  • New and better product, exploiting areas of opportunity
  • Tracking of customer perceptions of product
  • A supply base that enables future growth with emphasis on best value and speed to market
  • New and better space offering to make clothing more accessible to our customers
  • Store specific cataloguing and effective stock management to put the right stock in the right stores for our customers
  • Plan A initiatives, eg ethical sourcing
Food
We fail to deliver profitable sales growth while maintaining an innovation gap over competitors
 Adverse effect on
financial results

Lost market share
and customer loyalty
  • Continual product and technical innovation to maintain competitive advantage
  • Continued emphasis on fresh food credentials
  • Independent quality assessment of key food lines
  • Tracking of customer perceptions of product
  • A supply base that enables future growth and further strengthens our food credentials
  • Food more accessible to our customers through new owned and franchised stores
  • Plan A initiatives, eg differentiated raw materials
PEOPLE: As we continue to grow our business and invest for the future, it's important we keep strengthening out team at every level from shop floor through to management.
We fail to attract, develop and retain talent with the correct skills and capability for succession Inability to develop and execute business plans

Competitive disadvantage
  • New senior management structure in place
  • A focus on senior leadership development and succession
  • Competitive reward packages
  • Buying Academies in head office and coaches in stores
  • Graduate recruitment and development
  • Employee communication
  • Tracking of employee satisfaction surveys
  • Tracking of customer perceptions of service
M&S DIRECT: We are further developing our M&S Direct business as an important part of our commitment to becoming a multi-channel retailer.
We fail to deliver sales growth by failing to meet customer expectations Adverse effect on
financial results

Lost market share
and customer loyalty
  • Capability to grow sales via new products and new customers
  • A focus on improved order fulfilment and customer service
INTERNATIONAL: We have ambitious plans to grow our International business through expanding our franchise operation, entering into partnerships and developing wholly-owned businesses in emerging economies.
We fail to grow our International business successfully through franchise operations, partnerships or wholly-owned businesses Adverse effect on
financial results

Damage to brand
  • A focus on appropriate resource required to integrate new ventures
  • New operational and financial processes in place to support growth of International businesses
  • Strong relationships forged with key stakeholders
PLAN A: We launched our five-year 'eco plan' in January 2007 to address challenges across five areas: cliemate change, waste, sustainable raw materials, fair partner and health.
We fail to deliver, measure or communicate performance against our Plan A commitments Lost stakeholder trust and confidence

Damage to brand
  • Governance in place to achieve our commitments, including a new Director of Plan A
  • Performance reporting further developed
  • Plan A integrated into day-to-day operation including Plan A Champions throughout head office and stores
  • Open dialogue with stakeholders developing our mutual understanding of the challenges we face

 

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Internal control

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 organisational structure with formally defined lines of responsibility and delegation of authority. There are also established procedures for planning, capital expenditure, information and reporting systems, and for monitoring the Group’s businesses and their performance.

 

These include:

Plans and policies

  • communication of the Group’s strategy, objectives and targets;
  • annual operating and capital plans and future projections;
  • operating policies and procedures;
  • clearly defined capital investment control guidelines;
  • review of treasury policies by the Board; and
  • review of social, environmental and ethical matters by the How we do business Committee.

Competent people

  • appointment of employees of the necessary calibre to fulfil their allotted responsibilities; and
  • clear roles and accountabilities with regular performance reviews.

Monitor and control

  • review by operating divisions of their plans with the relevant executive directors prior to submission to the Board for approval, including identification and assessment of risks;
  • monthly comparison of operating divisions’ actual financial performance against budget; and
  • regular consideration by the Board of year-end forecasts.

Regulatory update

  • reporting of accounting and legal developments; and
  • regular briefings on latest best practice corporate governance to the Board.

Assurance

On behalf of the Board, the Audit Committee examines the effectiveness of the Group’s:

  • assessment of risk by reviewing evidence of risk assessment activity and a report from internal audit on the process undertaken;
  • systems of internal control, primarily through approving the internal audit plan and reviewing its findings, reviews of the Annual and Interim financial statements and a review of the nature, scope and reports of the external audit;
  • action plans taken, or to be taken, to remedy any significant failings or weaknesses identified; and
  • action plans in place to manage significant risks.

 

The Audit Committee has completed its review of the effectiveness of the Group’s systems of internal control during the year, which are in compliance with the Turnbull Guidance 2005. It confirms the necessary action plans to remedy identified weaknesses in internal control are in place and have been throughout the year.

Internal audit’s work is focused on areas of priority as identified by the Group Risk Profile and in accordance with an annual audit plan approved each year by the Audit Committee and by the Board. The Board receives a full report from internal audit each year on the department’s work and findings and regular interim updates on specific issues. The Audit Committee monitors and assesses the role and effectiveness of the internal audit function on behalf of the Board.

The external auditors are engaged to express an opinion on the financial statements. They review and test the systems of internal financial control and the data contained in the financial statements to the extent necessary to express their audit opinion. They discuss with management the reporting of operational results and the financial position of the Group and present their findings to the Audit Committee.

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