Annual report and financial statements 2008

The Board

 

The Board’s role is to:

  • provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed;
  • set the Company’s strategic aims, ensuring that the necessary financial and human resources are in place for the Company to meet its objectives and review management performance; and
  • set the Company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

 

All directors are individually briefed on appointment, on the duties they owe as directors to the Company. During the year, the directors have been briefed on their new statutory duties as set out in the Companies Act 2006, which came into effect on 1 October 2007. The central duty is the duty to act in good faith and in a way most likely to promote the success of the Company for the benefit of its members as a whole. In fulfilling this duty, directors should have regard (amongst other matters) to the likely consequences of any decision in the long term; the interests of employees; the need to foster business relationships with suppliers, customers and others; the impact of operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between members of the Company.

The non-executive directors play a key governance role in protecting shareholders’ interests. They are independent and bring an external dimension to the Board, whilst complementing the skills and experience of the executive directors through their range of knowledge, experience and insight from other sectors.

In January 2007 we announced Plan A, our business wide ‘eco plan’ setting out our ambitions to change the way we operate over the next five years. We are committed to our principles of Quality, Value, Service, Innovation and Trust. Trust is earned from others as a result of our commitment to long-held values and the way we behave. Our Code of Ethics is available on our website. It outlines the behaviours that M&S expects from its employees, whether they are dealing with our customers, suppliers, shareholders or colleagues. This includes acting in a professional manner with honesty and integrity at all times and following Company policies and procedures. It also sets out guidelines on the environment, fraud and financial reporting, the management of conflicts of interest and how to raise concerns about possible improprieties in financial reporting or other matters. Senior managers sign their acceptance of the Code of Ethics each year and ensure it is applied in their areas of responsibility.

ˆ back to top

New Board structure

On 10 March 2008 we announced Board and senior management changes. We stated that Lord Burns would stand down as Chairman from 1 June 2008, when Sir Stuart Rose would be appointed Executive Chairman.

On 3 April 2008 Lord Burns wrote to shareholders setting out the detailed reasons behind the Board’s decisions. A copy of this letter is available on our website. The Board has taken this decision, cognisant of its prime objective to ensure the Company’s ongoing commercial success, and has put in place balancing controls to mitigate the governance concerns:

  • limited period of appointment of combined Chairman and Chief Executive until July 2011;
  • appointment of Sir David Michels as Deputy Chairman;
  • clear specification of duties of Executive Chairman and Deputy Chairman to ensure proper division of responsibilities and balance of power;
  • appointment of two new executive directors and increased responsibility for the Group Finance and Operations Director;
  • recruitment of an additional non-executive director to ensure a majority of independent directors on the Board. Following that appointment, the Board will consider the appointment of a further non-executive; and
  • annual voting by shareholders for Sir Stuart Rose’s reappointment as a director starting at the 2008 AGM.

 

The Board unanimously believes that the overall arrangements represent a sensible way forward and provide a sound transitional governance structure leading to the appointment of a new Chairman and separate Chief Executive by summer 2011. The new structure will ensure continuity of leadership, strengthen the Board and streamline the organisation. This will focus everyone on business performance during a period of significant trading uncertainty and it addresses investor concerns over succession.

ˆ back to top

Consultation with shareholders

The Code states that: “If exceptionally a Board decides that a Chief Executive should become Chairman, the Board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report”.

In the period leading up to the announcement on 10 March 2008 of the Board and senior management changes, the Board considered how best to communicate with shareholders. The changes proposed as part of the new governance and management structure were wide-ranging and not only included the appointment of the Executive Chairman and Deputy Chairman but two new Board appointments, the extension of the Finance Director’s role and a large number of senior management appointments, as well as news of the departures of several members of the senior management team.

In light of these proposed changes and their sensitivities the Board was concerned about the risk of leaks and did not consult major shareholders in advance. The Board was unanimous and clear that the proposed changes, taken as a whole, were in the interests of shareholders, customers and employees. The Board was also clear that whatever consultation was undertaken in advance of an announcement, its deliberations would nonetheless be subject to comment and scrutiny. The Board also knew that it would, rightly, be obliged under the Code to explain why it was proposing to combine the Chairman and Chief Executive roles and to answer questions from any shareholders with concerns.

Since the announcement, Lord Burns has consulted with a number of principal investors and shareholder representative bodies and he and Sir David Michels have met with those who had requested a meeting. A letter was also sent to all shareholders on 3 April 2008 setting out the detailed reasons behind the Board’s decisions.

ˆ back to top

Division of responsibilities

The Board has reviewed and agreed a clear specification of duties under the new Board structure to ensure a proper division of responsibilities and balance of power. The Deputy Chairman will have joint responsibility with the Executive Chairman, for the agenda and the overall Board structure and composition. He will chair the Nomination Committee, provide leadership for the non-executive directors, be responsible for monitoring Board effectiveness and lead on corporate governance issues. Sir David Michels has committed to spend sufficient and significant time in his role as Deputy Chairman. He is resigning from the Board of The British Land Company PLC and resigned from RAB Capital PLC on 18 April 2008 in order to ensure that he can fulfil his commitments.

In addition, the non-executive directors will meet independently at least twice a year to keep the governance structure under review to ensure appropriate safeguards are in place to protect shareholder interests.

ˆ back to top

Board balance and independence

On 29 March 2008 the Board comprised 11 directors: the Chairman, Chief Executive, four executive directors and five non-executive directors. On 1 June 2008 the Board will comprise 10 directors: the Executive Chairman, non-executive Deputy Chairman, four executive directors and four further non-executive directors. View the full list of directors, with details of their biographies and committee membership.

The Board concludes that each non-executive director is independent in character and judgement and will keep under review whether there are relationships or circumstances which are likely to affect, or could appear to affect, independence.

The principal roles of the Executive Chairman, Deputy Chairman and non-executive directors are set out below:


Executive Chairman

  • to ensure the Board achieves its full potential to build a sustainable business for the long term, generating shareholder value through consistent, profitable growth whilst making sure that our customers always trust us to do the right thing; and
  • to act within delegated authority from the Board for all aspects of the management of the Group, which includes developing appropriate business strategies for Board approval and achieving timely and effective implementation.

During the period of combined Chairman and Chief Executive: to keep the Deputy Chairman regularly informed on all matters that may be of importance to the Group, including its current performance and progress; and to monitor performance of the executive directors in their increased responsibilities, whilst focusing on the strategic growth areas of the business.

 

Deputy Chairman and Senior Independent Director

  • to lead on all governance issues including conducting the annual review of Board effectiveness and ensuring that the performance of individual directors is kept under review; and
  • to provide a communication channel between the Chairman and non-executive directors and, when required, principal shareholders including representative bodies.

During the period of combined Chairman and Chief Executive: to monitor the effectiveness of the role of Executive Chairman; independently to lead the succession process for the appointment of a Chief Executive by 2011; and to maintain contact with principal investors and representative bodies on a regular basis, keeping the Board informed.

 

Non-Executive Directors

  • to bring an independent and external dimension to the Board’s activities and play their part in relation to strategy, performance, risk and people; and
  • within the spirit of partnership and mutual respect on the unitary board, to support, constructively challenge and monitor the executive team.

During the period of combined Chairman and Chief Executive: to keep the governance structure under review to ensure appropriate safeguards are in place to protect shareholder interests.

 

ˆ back to top

Information and professional development

The Chairman ensures that the directors receive accurate, timely and clear information. They receive regular updates on business performance against the annual operating plan and investment decisions, together with business reports and presentations from senior management at Board meetings. Directors are encouraged to update their skills, knowledge and familiarity with the Group through their initial induction, ongoing participation at Board and Committee meetings, meeting employees at store locations and elsewhere and are kept up-to-date on the views of customers and shareholders. The Board is regularly updated on governance and regulatory matters.

Graham Oakley as Group Secretary acts as a sounding board to the Chairman and individual directors. He supports the Chairman in ensuring the Board functions effectively and fulfils its role. He is secretary of the Audit, Remuneration and Nomination Committees and also heads the Corporate Governance Group, which supports the Board and its committees, as well as providing advice on a range of issues to commercial colleagues. From 1 June 2008 the Group Secretary will have an additional reporting line to the Deputy Chairman to assist him in fulfilling his governance duties.

There is an established procedure whereby the Board or any of its Committees may take independent professional advice when appropriate. Any individual director, wishing to do so in the furtherance of their duties, may also take independent professional advice through the secretary at the Company’s expense. Directors are granted an indemnity from the Company in respect of liabilities incurred as a result of their office. In respect of those matters for which they cannot be indemnified, the Company maintains appropriate liability insurance for the benefit of directors.

ˆ back to top

Board performance

The performance of the Board is a vital component of the Group’s success and the Board is keen to ensure that the annual review of its performance builds on the previous year’s results to ensure a continuous process. In September 2007 the Board approved an action plan based on the key themes from the 2006/07 review of process, people, strategy and performance measures. The action plan also referred to the new statutory directors’ duties, to address these as an integral part of Board performance. The Board agreed to conduct the 2007/08 review ‘in house’ and that it be led by Lord Burns. In January 2008 each director completed a questionnaire to rate collective performance over some 20 questions with free text boxes for comments. The Chairman then reviewed an unattributed executive summary, highlighting key outcomes which he has subsequently discussed with individual directors.

Some of the outcomes achieved in 2007/08 following the 2006/07 review:

  • a greater focus on the long-term growth prospects of the business leading to the announcement in November 2007 of our priorities for the next five years. Whilst continuing to invest in our core business we have ambitious plans for our UK property portfolio, M&S Direct and International businesses and
    Plan A;
  • regular reviews of the bench strength of senior management and future skills and composition of the Board, leading to the new governance and management structures announced on 10 March 2008. Succession planning will continue to be a priority and from 1 June 2008 Sir David Michels, Deputy Chairman, will chair the Nomination Committee; and
  • introduction of an online Board portal to provide a more secure, efficient and flexible method of delivering Board papers and easy access to information for induction and ongoing development.

 

From 1 June 2008 Sir David Michels as Deputy Chairman will lead the Board’s review of its performance. He will also hold meetings with the non-executive directors, without the executive directors present, to monitor and reflect on the effectiveness of the new governance structure and to appraise the performance of the Executive Chairman.

ˆ back to top

Individual performance

The performance of the executive directors was reviewed individually by the Chief Executive against set objectives. Remuneration is directly linked to these reviews and determined by the Remuneration Committee. Similarly, the Chief Executive’s performance was reviewed by the Chairman. The Senior Independent Director reviewed the Chairman’s performance against a set of previously agreed objectives. The performance of the non-executive directors was reviewed individually by the Chairman. This year’s questionnaire also invited each director to comment on the individual performances of themselves, other directors and the Chairman.

Under the new Board structure from 1 June 2008 the Deputy Chairman will review the performance of the Executive Chairman, taking into account the views of the non-executive directors.

ˆ back to top

Committee performance

The process for reviewing the effectiveness of the Committees in 2007/08 has been to combine ongoing reviews with a simple questionnaire led by each of the respective chairmen. The Audit and Remuneration Committees undertook a review looking at their methods of operation and processes and combined this with the use of questionnaires which were conducted in March 2008. An executive summary was produced for the Chairman of each Committee which they discussed with their respective Committee members.

ˆ back to top

Succession planning and senior leadership development

During the year successional planning reviews were held by the Board and the Nomination Committee resulting in key appointments to the Board and senior management. We made important organisational changes, promoting existing talent and bringing in new people, to ensure we have the right skills in key areas of focus over the next three years. Senior leadership development remains a priority.

ˆ back to top