Corporate governance report continued

Code principles

Leadership

Effectiveness

Relations with shareholders

Accountability

Remuneration

Code principle – Leadership

Introduction by Dr John McAdam

As the board of directors we are collectively responsible for the long-term success of the company, although there is a clear division of responsibility between the non-executive directors whose role is to challenge and advise and the executive directors who have responsibility for running and operating the business. The executive directors provide the board with its window into the business and the relationships within the board need to be built on trust. Board colleagues are always extremely supportive of the need to supplement the scheduled board calendar with conference calls and are generous with their advice and input.

Overview of the board's responsibilities

  • The board sets the strategy of the group, ensuring the long-term success of the group for customers, investors and wider stakeholders, and in creating shareholder value
  • The board is responsible for challenging and encouraging the executive team in its interpretation and implementation of how it manages the business, and that it is doing so in accordance with the strategic goals the board has set
  • The board has responsibility for ensuring the company's internal control systems (including financial, operational and compliance) and processes are sound and fit for purpose. See the accountability section of this report for more detail
  • The board must ensure that the company has the necessary financial resources and people with the necessary skills to achieve its objectives. It also reviews managerial performance annually
  • The UUG board has oversight of capital expenditure projects within UUW which exceed £50 million, and any project which materially increases the group's risk profile or is not in the ordinary course of the group's business
  • Full details of the matters that the board has reserved for its own decision-making, due to their importance to the business or the working of the board, can be found on our website at corporate.unitedutilities.com/corporate-governance

Governance structure for our board and our committees

In line with the Code, the board delegates certain roles and responsibilities to its principal board committees, as shown in the structure chart. Whilst the board retains overall responsibility, a sub-committee structure allows these committees to probe the subject matter more deeply and gain a greater understanding of the detail, and then report back to the board on the matters discussed, decisions taken, and where appropriate make recommendations to the board on matters requiring its approval. The reports of the principal board committees required by the Code can be found on the subsequent pages. Minutes of the board and principal committee meetings (with the exception of the remuneration committee) are tabled at board meetings and the chairs of each of the board committees report verbally to the board on their activities. The Chairman chairs the nomination committee; all other principal board committees are chaired by independent non-executive directors who have particular skills or interests in the activities of those committees.

The executive team is chaired by the CEO, and its members are the senior managers who have a direct reporting line to the CEO. The executive team meets monthly; it is responsible for operational matters and implementing the strategies that the board has set, and the day-to-day running of the business. Short biographies of the executive team can be found on our website at corporate.unitedutilities.com/united-utilities-executive-team

The structure chart also shows the principal management committees and a brief description of their roles.These committees enable senior management to understand and, if necessary, challenge the business in its interpretation of the implementation of the strategies the board has set. The board received reports from the CEO and CFO at every scheduled board meeting, providing the board with an updated overview of the business and its financial position.

Pictured: Rooden reservoir, Piethorne Valley, Greater Manchester.

Governance structure of the board and its principal committees and the principal management committees.

Group Board

Chair: Dr John McAdam

Principal board committees

Audit committee

Chair: Brian May

Remuneration committee

Chair: Sara Weller

Nomination committee

Chair: Dr John McAdam

Corporate responsibility committee

Chair: Dr Catherine Bell

Treasury committee

Chair: Brian May

The committee considers and approved borrowing, leasing, bonding and other banking facilities within the limits set by the board. The CFO and treasurer are also members. Some powers are sub-delegated, within certain limits, to the CFO and treasurer.

Chief executive officer

Steve Mogford

Principal management committees

Executive Team

Chair: Steve Mogford, CEO

This forum is responsible for implementing the board's strategy and the day-to-day operation of running the business and the CEO will cascade decisions made by the board to the business via this forum.

Group audit and risk board

Chair: Steve Mogford, CEO

Security governance board

Chair: Sally Cabrini, business services director

This forum is responsible for setting and ensuring the implementation of the security goals of the business, encompassing all elements of security, fraud, business continuity and resilience and any emerging security issues.

Quarterly business review

Chair: Steve Mogford, CEO

This forum is responsible for the quarterly review of operational and financial performance.

Political and regulatory steering group

Chair: Gaynor Kenyon, corporate affairs director

This forum is responsible for discussing political and regulatory issues affecting the company, where any 'horizon scanning' issues are raised and business responses to consultations are agreed.

Key:

Best service to customers

Lowest sustainable cost

Responsible manner

Board activity in 2015/16Cross referenceLink to strategic objectives
Leadership and employees
  • Reviewed and discussed the health and safety of employees
See Our performance 2015/16
  • Considered board succession planning and the appointment of a new non-executive director
See Nomination committee
  • Reviewed and discussed executive succession plans and the needs of the business and received an update on the activities to develop talented employees and the people plan
See Nomination committee
  • Discussed the results of the annual employee engagement survey
See Our performance 2015/16
Strategy
  • Debated and discussed non-household water and wastewater retail businesses and the joint venture with Severn Trent
See Chairman and Chief Executive Officer's review
  • Approved the group's updated corporate responsibility framework and business principles
See Corporate governance report continued
  • Held a strategy session debating and discussing the future direction of the Wholesale business and the opportunities for growth outside the regulated boundaries of the business
Governance
  • Reviewed and debated the risk profile of the group and in particular the principal risks
See Principal risks and uncertainties
  • Approved designated authority levels for the group's non-regulated activities
  • Reviewed and discussed updates on cyber security and information management strategies
See Principal risks and uncertainties
  • Reviewed the terms of reference for the audit, remuneration, treasury and corporate responsibility committees and received post-meeting reports from the chairs of each committee summarising discussions and actions
  • Reviewed biannual updates on changes and developments in corporate governance and the implementation of any changes required
  • Reviewed and discussed the evaluation of the board, its committees and individual directors and conflicts of interest
See Corporate governance report continued
  • Reviewed the performance of the external auditor and recommendation for reappointment
See Audit committee
  • Reviewed the effectiveness of the risk management and internal control systems
See Corporate governance report continued - code principles
Regulation (UUW business)
  • Reviewed the group's response and management of the Lancashire water quality incident and independent reviewers' reports and lessons learnt
See Our performance 2015/16
  • Monitored progress of the implementation of the customer experience programme
See How we create value within our operating environment
Non-regulated business
  • Reviewed progress on the group's renewable energy generation and opportunities for expansion
See Our performance 2015/16
Shareholder relations
  • Received and discussed a presentation by Makinson Cowell on investors' views and perceptions
See Corporate governance report continued - code principles
  • Received and discussed feedback from roadshows/presentations to investors by the CEO and/or the CFO
See Corporate governance report continued - code principles
Financial
  • Reviewed and approved the 2015-20 dividend policy
See Chairman and Chief Executive Officer's review
  • Reviewed and approved the half and full-year results and associated announcements
  • Reviewed and approved the company's tax strategy
See Our performance 2015/16
  • Reviewed and approved the company's treasury policy and insurance arrangements
  • Reviewed progress with material cases of litigation involving the group
See Principal risks and uncertainties
  • Reviewed and discussed pensions and proposals in relation to the UU defined benefit pension scheme
See Our performance 2015/16

The boardroom table

Board composition

Executive 25%

Non-executive 75%

Male 75%

Female 25%

Attendance at board and committee meetings

Eight scheduled board meetings were planned and held during the year (2015: eight). A number of other board meetings and telephone conferences were also held during the year, as the need arose. The table below shows the actual number of scheduled meetings attended and the maximum number of scheduled meetings which the directors could have attended. Only in exceptional circumstances would directors not attend board and committee meetings. Similarly, every effort is made to attend ad hoc meetings either in person or via the use of video or telephone conferencing facilities if needs be. None of our non-executive directors have raised concerns over the time commitment required of them to fulfil their duties.

On the evening before most scheduled board meetings all the non-executive directors meet together with the CEO; this time is usefully spent enabling board colleagues to share views and consider issues impacting the company. Time together also helps to build relationships on a personal level, which contributes to better relationships and decision-making around the board table.

Board
meetings
Audit
committee
Remuneration
committee
Nomination
committee
Corporate
responsibility
committee
Treasury
committee
Dr John McAdam8/83/3
Steve Mogford8/82/2
Russ Houlden8/84/4
Dr Catherine Bell8/84/44/43/32/2
Stephen Carter8/84/43/32/2
Mark Clare8/84/43/3
Brian May8/84/43/34/4
Sara Weller8/84/43/3

Actual number of meetings attended

Maximum number of scheduled meetings which the directors could have attended

Code principle – Effectiveness

Introduction by Dr John McAdam

Board colleagues have approached the evaluation process with renewed vigour this year, underpinned by the forthcoming challenges of competition and the Lancashire water quality incident. There is a clear message that there is more to do.

Board evaluation

Our board evaluation was conducted internally this year building on last year's external evaluation conducted by Lintstock consultants.

The internal evaluation process was facilitated by the company secretary and his team. It was based on the completion of questionnaires by board members assessing both the performance of the board and of each of its principal committees, and that of the Chairman and each of the individual non-executive directors.

In addition to board members, other members of the executive team who regularly attend and support the various committee meetings were asked to complete the same questionnaires where applicable.

The anonymity of all respondents was ensured throughout the process in order to encourage an open and frank exchange of views. The results, once reviewed by the company secretary, were then discussed with the Chairman and the chair of the relevant committee; tabled at a meeting of the relevant committee; and then presented to the board. The Chairman reviewed the performance of the individual directors. Mark Clare, as the senior independent director, in discussion with the other non-executive directors, led the review of the Chairman's performance.

A summary of the analysis of the 2015/16 evaluation is as follows:

2015/16 Areas of assessmentCommentary and actions
Board composition and expertiseBoard members' skills and expertise were felt to be appropriate, and in particular the board members' knowledge and understanding of the regulatory environment the company operates within, along with their understanding of the views of regulators, customers and investors. Additional skills/experience from an engineering/industrial background would strengthen the board.
Board agendaGiven the seriousness of the Lancashire water quality incident it was felt that the considerable board time spent on the issue was appropriate. Going forward, the board should allow time to consider the customer experience, along with the key strategic issues of market reform and competition in the sector.
Board supportPresentations to the board and the timeliness of board documentation were appropriate; improvements had been made to the content, format and length of papers, although this was an area where focus should be kept under review to ensure continued improvement. The support and training needs of board members continued to be addressed.
Wider strategic oversightThe involvement of the board in the development of the strategic direction of the group was considered to be appropriate and the format and content of the board strategy away day held during the year was felt to have improved, but more time should be allowed for key strategic topics.
Risk management and internal controlThe board's approach to the management of risk was considered to be appropriate, with suggestions being made to refine the visibility and oversight of the management of operational and reputational risk in light of the Lancashire water quality incident.
Succession planning and human resource managementBoard members felt that the senior management structure and succession planning for executive and key management positions supported the strategic objectives. The development of a board succession planning matrix for the board would provide clarity on timescales (see Nomination committee). The visibility of potential internal candidates for succession amongst the executive team should be maintained and enhanced, as should the development of executives and candidates suitable to fulfil critical posts to support the talent pipeline.
CommitteesThe composition and performance of the audit, remuneration, nomination, corporate responsibility and treasury committees were considered to be appropriate, and the feedback from committee meetings by committee chairs was full and transparent and meetings chaired effectively. Specific actions identified were as follows:
Nomination committee: develop a board succession planning matrix and gain an understanding of the granularity of timescales for succession planning;
Remuneration committee: ensure that succession planning activities and remuneration activities were aligned;
Audit committee: review the effectiveness of the assurance of risk management systems particularly in relation to the oversight of the management of operational and reputational risk; and
Corporate responsibility committee: review the analysis of reputational risk to ensure alignment with the audit committee.
Individual directorsThe individual performance of the directors was assessed, all of which were considered to be independent and effective, and all directors demonstrated the expected level of commitment to the role. The review of the Chairman's performance (led by the senior independent director) and that of Catherine Bell concluded that both continued to demonstrate an effective and independent approach, fulfil the expected commitment to the role and make an enthusiastic contribution to discussions in meetings. With the exception of Catherine Bell, all directors would be offering themselves for reappointment at the 2016 AGM.
2014/15 evaluation recommendationsActions taken during 2015/16
On completion of the board's involvement in the PR14 process, allow more time to address market reform and competition.More board time has been devoted to market reform and competition.
Continued refinement of content and format of board papers.CEO and CFO monthly board updates and performance reports have been revised and well received.
Consider improvements to the board strategy day.Format and content of the strategy away day had improved, but still it was felt more time would be preferable. Action to be carried forward.
Maintain and enhance the visibility and engagement by the board with potential candidates for succession and maintain the focus on succession planning for executives and those in critical posts in the talent pipeline.A number of members of the executive team have given presentations to the board on a number of topics. There were a number of events held during the year where the board has the opportunity to meet with executives and other senior managers.

Training

Directors regularly receive updates to improve their understanding and knowledge about the business and the regulatory environment. Specific training has been provided during the year on a number of areas and topics including regulatory matters and changes in reporting and governance requirements, particularly in relation to the new requirements of the Market Abuse Regulations due to come into force in July 2016.

Culture and values

Our culture is expressed through our core values which support and facilitate the achievement of our strategic objectives. We have made significant progress in improving the customer experience and embedding a customer service orientated culture in recent years. Customer complaints reduced by approximately 75 per cent across the 2010–15 period, and this was recognised in Ofwat's final determination in December 2014. In the strategic report, details of the KPIs used to monitor customer service can be found. Our employee surveys show employee engagement at 75 per cent. Improving customer service and carrying out our activities with integrity and fairness, for all our stakeholders, are interrelated values. The management team are working hard to embed these values in our business. A customer nomination system has been introduced, enabling customers to nominate employees for 'WOW! Awards' as recognition for a job well done. We have received tremendous feedback, demonstrating the 'extra mile' our employees go to in serving our customers. Furthermore, with the implementation of our 'systems thinking' approach and improving the technology deployed across our asset base during the current regulatory period, we would expect to see further improvements in the standard and efficiency of our service to our customers.

Our business principles can be found on our website at corporate.unitedutilities.com/united-utilities-business-principles.aspx

Once published, the board will review the observations of the Financial Reporting Council and its suggestions to boards in promoting good practice in corporate culture.

The best service for customers

At the lowest sustainable cost

In a responsible manner

Core value:

Customer focus

Everything we do will be about customers and not us.

Core value:

Integrity

We will make promises knowingly and keep them.

Core value:

Innovation

We will innovate to make our services better, safer and faster.

WOW! Awards

Since we introduced The WOW! Awards scheme in 2012, our employees have been nominated over 10,300 times (as at 31 March 2016), and our employees' efforts have earned United Utilities the most nominations of all the companies involved in the scheme. So far, we have eight employees who have each been nominated 100 times and joined the 100 Club! At the annual awards ceremony in November 2015, Lee Jones, one of our network customer inspectors based at Wilmslow water treatment works, whose tally at the time was 140 nominations, won the award for 'the most inspiring front liner'. Tremendous recognition for Lee, who explains his approach: "I just do what I'm trained to do – it's my job. When you get a WOW! nomination it really brightens up the day and I really appreciate it. It's a great feeling to know a customer is happy with the services we've provided."

At the same ceremony, United Utilities also won two awards: 'Putting Customers First' and 'Empowering Your People'.

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