Directors' statements

The Board and its structure

• General
• Induction
• Evaluation
• Board Committees
• Board and Board Committee and attendance information
• Relations with shareholders
• Annual General Meeting
• Group policies
• Whistleblowing
• Internal control
• Going concern

1. General

   The Board comprises a non-executive chairman, three executive directors and four independent non-executive directors; this composition was maintained throughout the whole of the period under review. Steve Williams is the senior independent director and in this regard his responsibilities include providing shareholders with an additional channel of communication with the company should the normal channels be either inappropriate or have failed to provide resolution. Additionally, in his capacity as senior independent director, Steve Williams may attend and participate at the meeting of any Board committee of which he is not a member.

   In fulfilling its responsibilities for determining the group’s strategic priorities and policies, providing overall direction and managing the balance between short, medium and long-term objectives, the Board reserves for itself decisions over certain critical areas including the approval of financial statements, long-term objectives and strategy, capital structure, organisational structure, Board and Board committee membership and the maintenance and development of good corporate governance practice.

   The Board will normally meet between eight and ten times annually, with one of the meetings always reserved for the review and testing of the group’s strategy. During 2007, the Board met on nine occasions.

   The Board agenda is clearly structured, and, in addition to business matters that require attention, the Board receives operational and progress reports from the chief executive, financial reports from the group managing director - finance, and a report from the group managing director - corporate affairs, including matters relating to corporate social responsibility, the environment, management and employees and issues affecting the public transport industry in the UK and mainland Europe. The Board also receives reports from the chairmen of its four principal committees and updates on regulatory, corporate governance and other compliance matters.

   The roles of the chairman and the chief executive are clearly defined and separated, and are set out in writing in the company’s manual of corporate governance. The chairman is responsible for the effective operation of the Board, corporate governance, regulatory compliance, Board succession and director performance evaluation and for ensuring constructive relations with shareholders.

   The role of the chief executive is to devise and implement appropriate business strategies and to run the business and implement decisions agreed by the Board, having due regard to the long-term interests of the shareholders, employees and other stakeholders.

   One third of the directors are required to submit themselves for re-election at each Annual General Meeting and all directors will have so submitted themselves every three years. Directors newly-appointed to the Board will be subject to election by the shareholders at the first available opportunity following their appointment.

   All directors have access to the advice and services of the company secretary who administers the Board and Board committee meetings, provides updates to the Board on regulatory and compliance developments and ensures that relevant procedures and regulations are adhered to. There is an established procedure for any of the directors to obtain independent professional advice at the company’s expense.

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2. Induction

   An induction programme applies to all new Board appointees and incorporates a full briefing on the group’s businesses (including site visits and meetings with senior managers), a review of the Board’s approach to corporate governance and other general corporate issues.

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3. Evaluation

   Each year the Board undertakes an evaluation of its own performance. The performance evaluation for 2007, conducted in early 2008, was led by Steve Williams as the senior independent director and included a specific element concerning an assessment of the performance of the chairman. The evaluation concluded that the Board was operating effectively. A small number of areas were identified where further improvements could be made including increasing the focus on the regulatory environment of the industry and further deepening directors’ knowledge of individual business units. These points are being addressed.

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4. Board Committees

   As an integral part of discharging its corporate governance responsibilities effectively, the Board has established four principal committees: Audit, Nomination, Remuneration and Safety. Each of the committees operates under clearly defined terms of reference which can be viewed on the company’s website www.arriva.co.uk within the corporate responsibility section.

   1. Audit Committee
      The Audit Committee comprises exclusively independent non-executive directors and is chaired by Simon Batey, a chartered accountant and former finance director of United Utilities plc and more latterly, until his retirement from that post, chief financial officer of Thames Water Utilities Limited. The other members of the Committee are Steve Williams and Veronica Palmer. The Audit Committee’s principal areas of focus are:
      
      
      1. Financial reporting
         The discipline of financial reporting is clearly an activity of crucial importance to the company, its shareholders and the wider stakeholder community. It is the responsibility of the Audit Committee to monitor and provide assurance to the Board on the integrity of all of the company’s financial statements. As part of this process the committee is specifically required to review and challenge where necessary the continued application of the company’s accounting policies (and any changes thereto), the methods used to account for significant or unusual transactions and the clarity of the financial statements and reports.
         
         
      2. Internal control and risk management systems
         The Board has delegated to the Audit Committee the responsibility of reviewing and providing assurance as to the company’s systems of internal control and risk management, including risk transfer and risk retention policies and practices.
         
         In this regard the Audit Committee is assisted by the Group Internal Audit function, the head of which reports directly to the chairman of the Audit Committee.
         
         
      3. Internal audit
         A key element in the company’s internal control and risk management mechanism is the Group Internal Audit function. A key responsibility of the committee is to provide assurance to the Board that appropriate action is being taken by the businesses to address relevant internal audit findings that have been communicated to the committee via the Group Internal Audit function.
         
         Additionally, the committee is responsible for monitoring the effectiveness of the Group Internal Audit function. This includes an assessment of the ongoing adequacy of internal audit resources and the function’s continuing freedom from any management or other material restrictions which may impact on its ability to operate with complete independence and objectivity.
         
         
      4. External audit
         The external audit process is fundamental to any company’s audit programme and the role of the external auditor is to provide assurance to the members of the company as a whole that the financial statements produced by the company are in all material respects true and fair. Whilst the external auditor is ultimately appointed by the shareholders in general meeting it is inevitable that the regular contact with the company is via the executive directors, senior managers and other employees.
         
         It is therefore against this background that the Audit Committee is charged by the Board with the responsibility of ensuring that the external auditor remains completely independent of the company (and relevant officers of the company) in all material respects and that the external audit firm is adequately resourced (both from a technical and territorial capacity) to enable it to deliver a completely objective audit to the shareholders. It is the responsibility of the Audit Committee to formally recommend to the Board each year the continuation, or removal and replacement, of the external auditor. This process is supported by a full annual review of the expertise, resources, effectiveness and independence of the external audit firm.
         
         Additionally, the Audit Committee, as part of its ongoing process for ensuring continued audit independence, reviews and approves the level and nature of non-audit work performed.
   2. Nomination Committee
      The Nomination Committee membership comprises a majority of independent non-executive directors and is chaired by Sir Richard Broadbent. The other members of the committee are Simon Batey, Nick Buckles, Veronica Palmer and Steve Williams.
      
      The principal responsibility of the committee is to keep under regular review the structure, size and composition of the Board and to determine whether the level of resourcing remains appropriate. This process will also include a regular review of the succession plans at both Board and senior management levels.
      
      All Board appointments and the appointment of the senior independent director and the chairmen of the Board committees are the responsibility of the committee which is required, after appropriate review, research and interview, to make recommendations to the Board for approval.
      
      
   3. Remuneration Committee
      The committee comprises exclusively non-executive directors and is chaired (effective from 5 September 2007) by Nick Buckles. The other members of the committee are Sir Richard Broadbent (from September 2007) and Simon Batey. Veronica Palmer ceased her membership of the committee on 5 September following her appointment as chairman of the Board’s Safety Committee.
      
      A full review of the work of the committee appears in the Directors’ Remuneration Report.
      
      
   4. Safety Committee
      Given the nature of the group’s businesses, the Board recognises the fundamental importance of safety and related issues. In order that sufficient and appropriate attention to safety and related disciplines can be given adequate attention by the Board, the Safety Committee was established a number of years ago to address these matters.
      
      The key responsibilities of the committee are to monitor and provide assurance to the Board on the company’s safety policy and the arrangements for its implementation and reporting. The committee receives reports from the group safety and environment manager and reviews the safety related key performance indicators.
      
      Since 5 September 2007, the committee has been chaired by Veronica Palmer, the previous chairman, Nick Buckles, having assumed the chairmanship of the Remuneration Committee from the same date and ceasing to be a member of the Safety Committee from the same date. The other members of the committee are Steve Williams and Steve Clayton, Sir Richard Broadbent having ceased his membership of the committee on 5 September. The group safety and environment manager supports the committee in its work.
      
      The company’s safety policy statement can be viewed on the website at www.arriva.co.uk.
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5. Board and Board Committee and attendance information

   	BOARD	AUDIT	NOMINATION	SAFETY	REMUNERATION
   Number of Meetings/Attendance	9	3	3	2	3
   Sir Richard Broadbent*	9	-	3	1	1
   D R Martin	9	-	-	-	-
   S J Clayton	9	-	-	2	-
   S P Lonsdale	9	-	-	-	-
   S G Batey	9	3	3	-	3
   N P Buckles*	9	-	3	1	3
   A V M Palmer*	9	3	3	1	2
   S G Williams	9	3	3	2	-

   * Sir Richard Broadbent was appointed to the Remuneration Committee during the course of the year and at the same time stood down from his membership of the Safety Committee. Veronica Palmer and Nick Buckles exchanged their respective roles as chairman of the Remuneration and Safety Committees during the course of the year; Nick Buckles also relinquished his membership of the Safety Committee and Veronica Palmer that of the Remuneration Committee. Each of those three directors has attended all committee meetings that they were eligible to attend as members.

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6. Relations with shareholders

   The company has an established programme of communication with shareholders and the corporate communications department organises a regular series of presentations to analysts and investors. It remains the Board’s intention that these arrangements should continue as they represent an important feature of the process of facilitating helpful and constructive dialogue between the company and its major investors, subject of course to continuing to meet all regulatory and statutory requirements.

   A procedure exists for the Board as a whole to receive direct feedback from the company’s brokers of the investing community’s perception of the Board’s performance and strategy.

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7. Annual General Meeting

   The Annual General Meeting is an opportunity for the Board to communicate with shareholders, particularly private shareholders. A presentation on the progress and performance of the business is made by the chief executive following the formal business of the meeting, and the chairmen of the Audit, Nomination, Remuneration and Safety Committees are available to answer questions relating to their particular areas of responsibility.

   Following each resolution, the meeting is informed of the number of proxy votes submitted in respect of each resolution; this information is also published on the company’s website following the meeting.

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8. Group policies

   The Board has approved and circulated across all the group’s businesses a set of policies which are designed to strengthen and support the group’s corporate governance and internal controls and to address key risks identified through the risk assessment and control process. As part of the internal control process, businesses are required to certify their continued compliance with these policies. The policies are kept under review to ensure compliance with best practice and any changes to the regulatory and statutory regimes. All companies within the group are required to follow group policies, although it is recognised that in the case of newly acquired businesses there may be a period of time before full implementation can be achieved. Businesses are required to report to the chief executive on an annual basis on any departures from, or non-compliance with, group policies.

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9. Whistleblowing

   The group operates a whistleblowing policy and procedure whereby employees can, in confidence, report on matters where they feel a malpractice is taking place, or if health and safety standards are being compromised. Areas that are addressed by this procedure cover financial malpractice, criminal activities, dangers to health and safety, improper or unethical behaviour and risks to the environment.

   The procedures allow for employees to raise their concerns with line management or, if this is inappropriate, to raise them on a confidential basis. A confidential telephone mailbox and confidential e-mail facility are provided to protect the identity of employees in these circumstances. The complaint will be investigated in a confidential manner and, after a decision is made as to what further steps should be taken, feedback is given to the person making the complaint. An official written record is kept of each stage of the procedure.

   The whistleblowing policy and its operation is subject to periodic review by the Audit Committee; the last review was in February 2008.

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10. Internal control

    Companies are required to report to shareholders that they have conducted an annual review of the effectiveness of the system of internal control. The review extends beyond financial controls to encompass operational and compliance control and risk management.

    The directors are responsible for the group’s system of internal control. Whilst no system can provide absolute guarantees and protection against material loss, the systems are designed to give the directors reasonable assurance that problems can be identified promptly and remedial action taken as appropriate.

    The Board has reviewed the effectiveness on an ongoing basis of the system of internal control for the accounting period under review.

    The key features of the internal control system are:

    1. Organisation structure
       The structure of the organisation is so designed to minimise, as far as possible, the complexity of the reporting arrangements commensurate with the commercial demands made on the group. The structure focuses on the core businesses of the group and stringent reporting procedures are applied to ensure that performance is closely monitored so that effective and prompt action can be taken if the need arises. Certain of the group’s functions including company secretarial, legal, taxation, internal audit, treasury and insurance are undertaken centrally.
       
       
    2. Financial reporting
       The group operates a comprehensive financial control system with each operating division’s performance being closely monitored against budget, forecast and prior year performance. Monthly management accounts are prepared for consideration by the Board as a whole, and are issued in a timely manner to ensure proper consideration can be given to the information.
       
       
    3. Group Internal Audit
       The internal control systems are comprehensively supported by the Group Internal Audit department. Group Internal Audit is responsible for advising all levels of management, and the Board of directors through the Audit Committee, on the quality of the financial and operational systems of control for all parts of the group. This review and appraisal function does not relieve line management of its responsibility for effective control.
       
       Group Internal Audit functions by conducting independent appraisals leading to reports detailing findings and agreed actions. Group Internal Audit undertakes annual financial reviews of the balance sheets of all of the group’s material trading subsidiaries and engages in a cycle of operational and risk reviews both on scheduled and random bases. The head of Group Internal Audit reports directly to the chairman of the Audit Committee.
       
       Group Internal Audit is staffed by appropriately qualified and experienced auditors.
       
       
    4. Risk assessment and risk control
       An ongoing process for identifying, evaluating and managing the significant risks facing the group has been in place throughout the year under review and continues to remain in place.
       
       An essential element of good internal control is the continual process of risk assessment and the implementation of appropriate controls designed to eliminate or mitigate the effects of the crystallisation of identified major risks.
       
       The approach adopted by the Board involves a process which requires divisional operational staff to critically examine their responsibilities and identify those risks which are of such a nature that their crystallisation would have a material impact on their business. In order for this process to succeed it is essential that ‘ownership’ of risk awareness, risk identification and risk control is fully embraced by line management as an essential ingredient of its normal responsibilities.
       
       In implementing its risk assessment programme the Board has devolved to the Audit Committee the task of implementing and maintaining an appropriate risk assessment and control programme and it works closely with the head of Group Internal Audit in engaging in a formal review of the key business risks to the group.
       
       In the development of this programme there are a number of fundamental issues identified as being absolutely critical to the success and effectiveness of the risk management and control programme. In formulating its approach the commitee has structured the programme around the key areas of:
       
       
       • Clear leadership from the Board
       • The need for risk management to be seen as part of everyday activity and to be embedded in line management culture
       • Clear communication of the principles involved
       • Active support and involvement of the Group Internal Audit function
       • Regular review of the process and continual assessment of the changing nature of the risks presenting themselves to the business
       • Updating of the Group Policy Manual following the identification of new significant risks
       The Board recognises that, as in any business, Arriva must manage a range of risks in the course of its activities, and that failure adequately to manage these risks could adversely impact the business.
       
       As part of the ongoing risk assessment and management programme the principal risks and uncertainties facing the business have been identified and are reported on separately.
       
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11. Going concern

    The directors confirm that, after having made appropriate enquiries, they have reasonable expectation that the group and the company have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in the preparation of the Accounts. This approach was endorsed by the Audit Committee at its meeting held on 26 February 2008.

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