Compliance with the Code
The UK Corporate Governance Code (the Code) establishes the principles of good governance for companies; the following report describes how the Company has applied these principles to its activities. The Board remains committed to maintaining high standards of corporate governance. In the opinion of the Directors, the Company has complied with the Code throughout the period.
The Role of the Board
The Board's primary responsibility is to promote the long term success of the Company by the creation and delivery of sustainable shareholder value. The Board's strategy has four pillars to promote growth:
- Pipeline Delivery;
- Portfolio Focus;
- Geographical Expansion; and
KPIs have been designed to measure progress and delivery of the strategic plan and our four growth pillars. Further details are provided in the Key Performance Indicators
Board Membership and Responsibilities
Details of the Directors together with their biographical details can be found in the Board of Directors.
It is considered that each of the Non-Executive Directors is independent and is free of any business or other relationship which could materially interfere with, or compromise, their ability to exercise independent judgement. Each brings with them a breadth of experience which adds value to the decision making of the Board as well as the formulation and progression of the Dechra strategy. In line with the Code, at least half the Board, excluding the Chairman, is determined by the Company to be independent.
Senior Independent Director
Ishbel Macpherson has held the position of Senior Independent Director since October 2013. She provides a sounding board for the Chairman and is available to shareholders if they have concerns that have failed to be resolved through the normal channels. Ishbel led the recruitment process for the Chairman's successor (further details are provided in the Nomination Committee Report).
- Lead the Board in the determination of its strategy and achievement of its objectives.
- Ensure the effectiveness of the Board in all aspects of its role.
- Facilitate the effective contribution of the Non-Executive Directors, ensuring that all decisions are subject to constructive debate and supported by sound decision making processes.
- Ensure shareholder views are brought to the attention of the Board.
|Chief Executive Officer|
- Day-to-day management of Group operations and leading the Senior Executive Team (SET).
- Performance and results of the Group.
- Propose strategy.
- Execute strategy agreed by the Board.
|Chief Financial Officer|
- Responsible for financial planning and reporting for the Group.
- Management of financial risk.
- Develop and execute the strategic plan.
- Secure funding as required.
|Managing Director DVP EU|
- Management of the segment which contributes the majority of Group revenue.
- Nominated Director for health, safety and environmental matters.
- Development and execution of strategy in the EU.
- Provide independent and constructive challenge.
- Represent a broad range of commercial and industry experience and independent judgement.
- Evaluate strategy and risks.
The Board is responsible for the long term success of the Company. The main responsibilities and key actions carried out are set out below:
|Strategy and performance||Annual strategy review. Strategic decisions are made after reports and recommendations are received from management on markets, potential growth areas including acquisitions, product development, risk analysis, including execution risks.|
|Risk management and internal controls||Ongoing review of key risks and material internal control processes. Review of stress tests on the Group's forecasts to support the viability statement. Receipt of Audit Committee reports on risk management process and internal controls.|
|Oversight of the Group's operations||Approval of the annual budget and capital expenditure projects. Site visits to factories and offices in the UK and abroad. Review progress through business unit reports and detailed financial results report.|
|Governance||Receive governance reviews from external advisers, Company Secretary and internal audit. Review of Board skills, performance, composition and succession planning.|
Matters Reserved for the Board
There is a formal schedule of matters reserved for the Board. The schedule of matters covers a number of areas, including the following:
|Strategy and Management|
Approval and monitoring of long term objectives and strategy.
Approval of the Group's operating and capital expenditure budgets.
Major organisational changes.
Regular reviews of business performance.
Approval of acquisitions and business development proposals.
Approval of the Annual and Half-Yearly Reports and dividend policy.
Review of portfolio prioritisation.
Approval of budget.
Approval of treasury policy, and tax strategy and policy.
Interaction with the external auditor.
Ensure maintenance of a sound system of internal control and risk management.
Board and Committee composition.
Corporate Governance matters.
Approval of policies such as Health and Safety, Sanctions and the Anti-Bribery and Anti-Corruption Policy.
The Board is routinely scheduled to meet nine times per year. Attendance at the Board and Committee meetings during the year to 30 June 2016 is set out in the table below:
|Appointment Date||19 April|
Met 9 times
Met 4 times
Met 7 times
Met 4 times
* Chris Richards did not attend one Nomination Committee meeting prior to his resignation. He attended all Board, Remuneration and Audit Committee meetings prior to his resignation on 8 April 2016.
† Mike Redmond did not attend one Nomination Committee meeting as it dealt with the appointment of his successor.
‡Tony Rice has attended all meetings since his appointment.
Where Directors cannot attend a meeting, the Board papers are still provided allowing the Director to raise any queries or discussion points through the Chairman. Should Directors have concerns of any nature which cannot be resolved within the Board meeting, they have the right to ensure their view is recorded in the minutes.
During the year, in addition to the routine business, presentations by senior management, and strategic development, some of the other matters considered by the Board included:
- Sanctions Policy;
- Pipeline Delivery;
- Tax Management: Base erosion and profit sharing;
- Integration of Genera, Brovel and Putney;
- Global Supply Chain initiatives;
- Cash management and corporate credit cards;
- Review of material internal controls and viability statement stress testing results;
- Impact of the resignation of the Chief Financial Officer; and
- Appointments of Non-Executive Chairman, the Chairman of the Remuneration Committee and the Company Secretary.
The Board has formally delegated specific responsibilities to Committees, namely the Audit, Remuneration and Nomination Committees. The full terms of reference for each of these Committees are available on the Company's website (www.dechra.com) or on request from the Company Secretary.
|Committee||Role and Terms of Reference||Committee Report on Pages|
|Audit||The main responsibilities are:|
- to monitor the integrity of the financial statements of the Group, and assist the Board in ensuring that the Annual Report, taken as a whole, is fair, balanced and understandable;
- to review the effectiveness of the Group's internal financial control systems as described in the Audit Committee Report;
- to oversee the relationship with and review the effectiveness of the external auditor, monitor their independence and objectivity, and set the policy for non-audit work; and
- to review and approve the significant accounting policies.
Letter from the Audit Committee Chairman
Audit Committee Report
|Remuneration||The main responsibilities are:|
- to determine the remuneration, bonuses, long term incentive arrangements, contract terms and other benefits in respect of the Executive Directors and the Chairman;
- to oversee any major changes in employee benefit structures; and
- to approve the design of any employee share schemes.
Letter from the Remuneration Committee Chairman
Directors' Remuneration Report
|Nomination||The main responsibilities are:|
- to oversee the plans for management succession;
- to recommend appointments to the Board;
- to evaluate the effectiveness of the Non-Executive Directors; and
- to consider the structure, size and composition of the Board.
Nomination Committee Report
The Board also appoints Committees on an ad hoc basis to approve specific projects, or delegated Board matters as deemed necessary.
Director Insurance and Indemnities
The Company maintains an appropriate level of Directors' and Officers' insurance in respect of legal action against Directors as permitted under the Company's Articles of Association and the Companies Act 2006. The Company also indemnifies the Directors under an indemnity deed with each Director in respect of legal action to the extent allowed under the Company's Articles of Association and the Companies Act 2006. As at the date of this report, qualifying third party indemnity provisions are in force. A copy of the indemnity provisions will be available for inspection at the forthcoming Annual General Meeting.
The Board and its Committees are annually assessed to help ensure their effectiveness is maintained and that they remain fit for purpose. The Chairman manages the Board and oversees the operation of its Committees with the aim of ensuring that they operate effectively by utilising the diverse range of skills and experience of the various Board members.
Board Balance and Independence
The Board understands the importance of balance and refreshment in terms of its composition and keeps these matters under review. There have been the following changes at Board level over the past 12 months:
- Chris Richards (Non-Executive Director) resigned on 8 April 2016;
- Tony Rice (Non-Executive Director) was appointed on 5 May 2016; and
- Anne-Francoise Nesmes (Executive Director) resigned on 31 July 2016.
The following changes are expected to take place in the next 12 months:
- Michael Redmond will retire at the 2016 Annual General Meeting;
- Tony Rice will be appointed as Chairman with effect from the conclusion of the Company's forthcoming Annual General Meeting, subject to his election as a Director of the Company at that meeting; and
- Richard Cotton (Executive Director) is expected to join the Board in January 2017.
The Nomination Committee has retained an independent recruitment consultancy, Odgers Berndtson, to assist in the appointment of a further Non-Executive Director and it is anticipated a suitable appointment will be made before the end of the 2016 calendar year.
The Nomination Committee Report provides further information on the recruitment process undertaken during the year, succession planning measures taken by the Company together with how we are developing the talent pool internally.
Length of Tenure of Chairman and Non-Executive Directors as at 5 September 2016
Board Composition and Gender Diversity
The Board seeks to ensure that the Board and the Committees have an appropriate composition to manage their duties effectively and to manage succession issues. The Board supports diversity in its broadest sense and considers it an essential driver of Board effectiveness. The Board recognises it is important that its composition is sufficiently diverse and reflects a wide range of knowledge, skills and experience.
The Board does not have a formal diversity policy and is generally opposed to the idea of stated quotas for females. The Board believes that appointments should be made solely on merit, the key criterion being whether or not the appointee can add to or complement the existing range of skills and experience on the Board. The Board has 17% female representation. Female representation below Board level is 30% of the SET and 53% of the overall workforce.
Board Composition as at 5 September 2016
Non-Executive Chairman 17%
Non-Executive Directors 50%
Executive Directors 33%
Gender Diversity as at 5 September 2016
Senior Executive Team as at 30 June 2016
Overall Workforce as at 30 June 2016
Conflicts of Interest and External Board Appointments
Pursuant to the Companies Act 2006, all Directors have a duty to avoid a situation in which they have, or could have, a direct or indirect conflict of interest with the Company. The Articles of Association of the Company enable the Directors to consider and, if appropriate, authorise any actual or potential conflict of interest which could arise. There are safeguards which will apply when Directors decide whether to authorise a conflict or potential conflict. First, only independent Directors (i.e. those who have no interest in the matter being considered) will be able to take the relevant decision; secondly, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The Directors will also be able to impose limits or conditions when giving authorisation if they deem this to be appropriate. During the financial year under review no actual or potential conflicts have arisen.
Ian Page is the Non-Executive Chairman of Sanford DeLand Asset Management Limited (Sanford). The Board fully considered, at the time of his appointment, whether this would materially impact on his current time commitment as Chief Executive Officer and whether it could give rise to any conflict. As he is not involved in any investment decision made by Sanford it was not considered that any conflict would arise, nor that there would be any material impact on his time commitment.
Induction and Training
In order to ensure that the Board maintains its knowledge and familiarity with the Group's operations, at least one Board meeting per year is held at one of the Group's operational sites. This year, Board meetings were held at Dechra Pharmaceuticals Manufacturing (DPM) in Skipton, and at Dechra Veterinary Products EU sites in Sansaw, UK and Den Bosch, the Netherlands. These meetings provide the Board with an informal opportunity to meet with senior management based at these sites.
Any newly appointed Directors are provided with comprehensive documentation in relation to the remit and obligations of the role, current areas under consideration for the Board and the latest equity research reports. New Directors visit the various business units in order to allow them to meet with the executive teams and to be shown around the operations. Tony Rice has visited the Company's facilities and had meetings with the management teams at Skipton and Sansaw in the UK and Den Bosch in the Netherlands. In addition, meetings were arranged with the Group HR Director, Group IT Director, Company Secretary, Head of Internal Audit and Risk Assurance, Group Financial Controller, Group Treasurer and the Group Supply Chain Director.
Regular briefings are provided to the Directors, which cover a number of legal and regulatory changes and developments relevant to each Director's areas of responsibility. In addition, the Company Secretary informs the Directors of any external training courses which may be of relevance.
Each Director is entitled, on request, to receive information to enable him or her to make informed judgements in order to discharge their duties adequately. In addition, all Directors have access to the advice and services of the Company Secretary and senior managers, and may take independent professional advice at the Company's expense in connection with their duties.
Board Evaluation and Effectiveness
The effectiveness of the Board is important to the success of the Group and the Board undertakes an annual evaluation of its performance and that of its Committees, focusing on the following areas: (i) Board composition; (ii) strategy review and delivery process; (iii) the format of Board meetings and the decision process; (iv) training and development; (v) the performance of the Board and the individual Directors; (vi) Corporate Governance; (vii) leadership and culture; and (viii) risk assessment. One to one meetings were held by the Chairman with each of the Executive and Non-Executive Directors and Company Secretary.
- The 2015 Internal Board Evaluation
The findings of the internal evaluation were discussed at the September 2015 Board meeting. Overall, the review indicated that the Board operated effectively but noted the following focus areas:
- ensure that an overview of FAP remains a priority; and
- ensure that strategy is the first item on the Board's agendas.
Both of these actions have been addressed during the financial year.
- The 2016 Internal Board Evaluation
The findings of the internal evaluation were discussed at the July 2016 Board meeting. Overall, the review once again indicated that the Board operates effectively but noted the following focus areas:
- acquisition integration;
- bi-annual strategy review; and
- succession planning.
The last external evaluation was done in 2014. Due to the recent changes in the Board a decision as to when the next external evaluation will take place will be taken during the forthcoming year. However, we anticipate that sufficient time should lapse to enable the transition to the new Chairman.
Appointment and Re-election of Directors
On appointment, Directors are required to seek election at their first Annual General Meeting following appointment. At the forthcoming Annual General Meeting, Tony Rice, who was appointed to the Board on 5 May 2016, will offer himself for election. All of the remaining Directors will retire and offer themselves for re-election, excluding Michael Redmond. Each of the Directors has been subject to a formal evaluation by the Nomination Committee and it is considered that each Director continues to perform effectively and demonstrate commitment, not only in respect of their roles and responsibilities, but also in relation to the Group and its shareholders. The Board, therefore, recommends that shareholders vote in favour of their respective re-elections and the election of Tony Rice.
The Board seeks to present a fair, balanced and understandable assessment of the Group's position and prospects.
The responsibilities of the Directors and the external auditor in connection with the Financial Statements are explained in the Statement of Directors' Responsibilities and the Independent Auditor's Report.
Preservation of Value
The basis on which the Group generates and preserves value over the longer term and the strategy for delivering the objectives of the Group are to be found in the Strategic Report.
The Directors have a reasonable expectation that Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing these annual financial statements.
In reaching this conclusion the Directors have given due regard to the following:
- the Group's business activities together with factors likely to impact the future growth and operating performance;
- the financial position of the Group, its cash flows, available debt facilities and compliance with the financial covenants associated with the Group's borrowings, which are described in the financial statements; and
- the cash generated from operations, available cash resources and committed bank facilities and their maturities, which taken together provide confidence that the Group will be able to meet their obligations as they fall due.
As at 30 June 2016 the Group had cash balances of £39.1 million and net borrowings of £116.6 million (2015: cash balances of £45.9 million and net cash of £13.4 million). Further information on available resources and committed bank facilities is provided in notes 17 and 20 to the financial statements.
In accordance with the Code, the Board has determined that a three year period to 30 June 2019 is an appropriate period over which to provide its viability statement. This is supported by the Group's budget process which includes detailed projections for the next two financial years and broader projections from the third year of the five year strategic planning process. The Board believes this provides a sound framework for providing reasonable assurance on the Group's viability given the inherent uncertainty associated with longer term forecasts.
The Board's assessment has been made with due regard to the Group's current position, its future prospects, the strategic plan and the management of the Group's principal risks as detailed on Understanding Our Key Risks of the Strategic Report. The assessment is based on the assumption that the Group will be able to refinance its borrowing facilities which are currently committed until September 2019.
The Board reviews the budget and strategic plan annually and the Group's principal risks on a rolling basis throughout the year. The planning process considers risks to sales and cost forecasts for each part of the Group and the Group's consolidated income and cash flow forecasts.
Stress testing of the Group's projected cash flows has been carried out by considering those principal risks that could have a material impact on viability. The impact of these principal risks can be summarised into three categories, namely loss of profits on key products, pipeline delays, and loss of third party manufacturing customers. A number of severe but plausible stress tests have been conducted on these areas, both individually and in combination, together with an overall reverse stress test on the Group's borrowing facilities and covenant commitments.
The Board believes that the Group has adequate resilience due to its diversified product portfolio, its geographic footprint, a strong balance sheet, healthy cash generation and access to external financing, which includes committed facilities.
Based on the results of this analysis, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period from 30 June 2016.
Internal Control and Risk Management
The Board retains overall responsibility for determining the nature and extent of the risks it is willing to take in achieving its strategic objectives.
In accordance with the Code, the Board is responsible for reviewing the effectiveness of the Group's risk management and internal control systems, and confirms that:
- there is an ongoing process for identifying, assessing, managing and monitoring the Group's principal risks;
- the SET's assessment of the principal risks is considered to be robust and those risks that have the potential to impact liquidity have been considered in the assessment of the Group's viability;
- the principal risks and internal control processes have been monitored by the SET throughout the year and reviewed by the Board on a rolling programme throughout the year; and
- no significant failings or weaknesses in internal control processes have been identified.
Based on its review throughout the year, the Board is satisfied that the risk management and internal control systems in place remain effective and provide reasonable but not absolute assurance that the Group will be successful in delivering its objectives.
Further information on how the business manages risk can be found in the Strategic Report in How the Business Manages Risk.
Relations with Shareholders
Dialogue with Institutional Shareholders
Relationships with shareholders receive high priority and a rolling programme of meetings between institutional shareholders and Executive Directors is held throughout the year. The Chief Executive Officer and Chief Financial Officer give annual and half-yearly results presentations to institutional shareholders, analysts and the media in the UK. These meetings are in addition to the Annual General Meeting and seek to foster a mutual understanding of the Company's and shareholders' objectives. Such meetings are conducted in a format to protect price sensitive information that has not already been made generally available to all the Company's shareholders. Similar guidelines also apply to other communications between the Company and other parties such as financial analysts, brokers and the media.
The Company organises site visits on a periodic basis. Feedback is collated by the Company's brokers after such presentations. The feedback is then circulated to the Board for review and consideration. In addition, the Board is provided with a monthly market summary report which reports on share price and share register movements. Where material changes in respect of remuneration or governance are proposed, the Board seeks to consult with its major shareholders before implementing such changes.
During the 2016 financial year, an investor perceptions survey was undertaken by Edison Investment Research Limited which confirmed that Dechra's strategy was clearly defined and understood by our shareholders.
The Chairman and Senior Independent Director are available to meet shareholders upon request.
Constructive use of the Annual General Meeting
All members of the Board are scheduled to attend the Annual General Meeting (the Meeting) and the Chairmen of the Audit, Remuneration and Nomination Committees will be available to answer shareholders' questions at the Meeting. Notice of the Meeting is dispatched to shareholders at least 20 working days before the Meeting. The information sent to shareholders includes a summary of the business to be covered, with a separate resolution prepared for each substantive matter. When a vote is taken on a show of hands, the level of proxies received for and against the resolution and any abstentions are disclosed at the Meeting. The results of votes lodged for and against each resolution are announced to the London Stock Exchange and displayed on the Company's website. At the Meeting there will be an opportunity, following the formal business, for informal communications between shareholders and Directors.
5 September 2016