Governance framework

The Board recognises the importance of high standards of corporate governance and is committed to managing the Group’s affairs in accordance with the principles of good governance set out in section 1 of the Combined Code on Corporate Governance (‘the Code’). A summary of how the Company has applied the principles of the Code is set out below.

The Board has considered the provisions of the Code and considers that it was in compliance throughout the year ended 31 December 2008, except that as explained below neither the chair of the audit committee nor the chair of the remuneration committee were able to attend the annual general meeting.

Directors

The Board currently comprises an executive chairman, three further executive directors and five non-executive directors, one of whom, Adrian Martin, was appointed with effect from 1 December 2008. Bernard Asher has indicated his intention not to seek re-election when he retires at the forthcoming annual general meeting. All of the non-executive directors are considered by the Board to be independent and the Board’s structure, therefore, meets the requirements of the Code.

Bernard Asher was the senior independent director until 6 October 2008, when Jon Walden assumed responsibility for the role.

The Board has a separate chairman and chief executive in line with Code provision A.2. John Morgan as executive chairman takes responsibility for the overall strategy of the Group and for leading the Board and ensuring that it functions effectively, whilst Paul Smith as chief executive is responsible for managing the business and critically assessing Group strategy. The Board has set out and agreed a schedule that describes their individual roles and responsibilities.

The Board considers that the balance of relevant experience amongst its members enables it to exercise effective leadership and control of the Group. It also ensures that the decision making process cannot be dominated by any individual or small group of individuals.

An executive director may be released to serve as a nonexecutive director elsewhere provided that the Board is satisfied that the time commitment of such an appointment will not conflict with his duties to the Company. During the year, John Morgan stepped down from his non-executive appointment on the board of Genetix Group plc.

The Articles of the Company require each director to submit himself or herself for election by shareholders at the first annual general meeting after his or her appointment and for re-election at every third annual general meeting thereafter. Adrian Martin, having been appointed during the year, will be submitting himself for election at the forthcoming annual general meeting. In addition Paul Smith was last re-elected in 2006 and will be submitting himself for re-election at the forthcoming annual general meeting. Biographical details of the directors submitting themselves for election at the annual general meeting are set out here. As described below, Adrian Martin was appointed by the Board after a rigorous selection process and the Board considers that it will benefit from the increased accounting and financial expertise that he brings as well as from his experience over a number of years in non-executive roles with other listed companies.

Board effectiveness

Ten scheduled meetings of the Board were held during the year. The key purposes of the scheduled meetings were to review all significant aspects of the Group’s activities, supervise the executive management and to make decisions in relation to those matters that are specifically reserved to the Board. There is a formal schedule of these matters, which includes the approval of the Group’s strategic plans, annual budget, significant capital expenditure and investment proposals, major projects, acquisitions and disposals, internal control arrangements and annual and interim results. Other specific responsibilities are delegated to the Board committees described below and under the Group’s delegated authorities.

A formal agenda for each scheduled meeting is agreed with the chairman and is circulated well in advance of the meeting to allow time for proper consideration, together with relevant papers including key strategic, operational and financial information.

Attendance of individual directors during 2008 at scheduled Board meetings and meetings of the remuneration, audit and nominations committees are set out here.

Non-attendance by directors at meetings was due to conflicting commitments and in each case was previously agreed with the chairman.

Three of the scheduled board meetings in 2008 were held at offices of the Group’s divisional operations and were combined with presentations by divisional management. These meetings provided the non-executive directors with the opportunity to meet the senior managers in the divisions and to increase their knowledge and understanding of the Group’s operations and thus contribute more effectively to discussions of strategic and operational issues.

¹ No board meetings or audit committee meetings were held in December 2008 following Adrian Martin’s appointment.

Development and Board evaluation

Newly appointed directors receive a full induction, including a detailed information pack, visits to the Group’s operations and meetings with senior divisional management. Training on the role and responsibilities of directors is offered on appointment and subsequently as necessary. In particular, the directors have received guidance on the changes relevant to directors in the new Companies Act 2006. There are agreed procedures by which directors are able to take independent professional advice, at the expense of the Company, on matters relating to their duties. The directors also have access to the advice and services of the company secretary.

An evaluation was carried out of the Board’s performance, and that of its committees, during the year, focusing primarily on the effectiveness of the Board and its scheduled Board and committee meetings. This took the form of an internally developed assessment form, requiring each director to provide a rating against a series of statements and any additional comments. Evaluation of individual directors took the form of feedback from the other directors, which was followed by one to one meetings between the chairman and each director and, in the case of the chairman’s evaluation, between himself and the senior independent director. The evaluations of the directors concentrated on their individual effectiveness and their continued contribution and commitment to the role. The responses to the assessment form were circulated and discussed at a subsequent Board meeting and a number of actions were agreed.

Relations with shareholders

The Company welcomes regular dialogue with all its shareholders.

The executive directors undertake a programme of regular communication with institutional shareholders and with analysts covering the construction sector. In particular, presentations are made to institutional investors and analysts following the announcements of the preliminary and interim results. Written feedback from these meetings and presentations is distributed to all members of the Board. The senior independent director meets from time to time with major shareholders and the other non-executive directors are available to meet with them to listen to their views.

The Company encourages all shareholders to use the annual general meeting as an opportunity for effective communication with the Company. All of the directors seek to attend the annual general meeting. Due to unavoidable conflicting commitments, however, neither the chair of the audit committee nor the chair of the remuneration committee was able to be present at the 2008 annual general meeting. Other members of the Board were briefed to answer any questions in these areas. Details of proxy votes submitted for each resolution at general meetings, including proxy directions to withhold votes, are published on the Company’s website.

Board committees

The Board has established three committees; namely the remuneration, nominations and audit committees.

Remuneration committee

The members of the remuneration committee during 2008 were Gill Barr (chair), Bernard Asher, Jon Walden and Geraldine Gallacher. Adrian Martin will join the committee upon Bernard Asher’s retirement from the Board at the annual general meeting. The remuneration committee’s terms of reference are available for review on request and on the Company’s website under the investor relations section. Three meetings were held in the year covering all elements of the directors’ remuneration.

A report to shareholders on directors' remuneration can be viewed here.

Nominations committee

The members of the nominations committee during 2008 were John Morgan (chair), Bernard Asher, Jon Walden, Gill Barr, Geraldine Gallacher and, following his appointment, Adrian Martin. The terms of reference for the committee establish a framework through which it can review the balance and effectiveness of the Board to ensure suitable candidates are identified and recommended for appointment to the Board and the various Board committees. These terms of reference are available for review on request and on the Company’s website.

As referred to above, the nominations committee met formally during the year to review the structure, size and composition of the Board and to recommend to the Board the appointment of Adrian Martin as an additional non-executive director. It also met informally on several occasions to review the non executive director selection process. This process, which continued for most of 2008, involved agreeing the specific attributes and capabilities required for the role, instructing external search consultants, arranging interviews by individual members of the committee (and in some cases by the executive directors) with candidates proposed both by the consultants and other advisers and discussing the results of the interviews.

Audit committee

The members of the audit committee during 2008 were Bernard Asher, Jon Walden and Gill Barr. Adrian Martin also joined the committee on his appointment on 1 December 2008, although no meetings were held during the remainder of the year. Bernard Asher chaired the committee until 6 October 2008, when Jon Walden assumed the role. All committee members are independent non-executive directors. Biographical details of each member of the committee, including financial experience where relevant, are set out here. The Board is satisfied that the committee has the appropriate level of financial experience to fulfil its terms of reference. The terms of reference of the committee are available for review on request and on the Company’s website.

The committee had three scheduled meetings during the year. The first took place prior to the announcement of the Company’s results for 2007 and approval of the annual report, the second prior to the announcement of its interim results and the third before commencement of the audit for 2008. Senior representatives from the external auditors, the finance director and the group head of audit and assurance were invited to attend each of these meetings. The committee ensured, however, that it had the opportunity after each meeting to meet privately with the external auditors.

The main purpose of the meetings was to review the scope and results of the audit and the effectiveness of the external audit process, to monitor the integrity of the annual and interim financial statements and to discuss with the external auditors their overall work plan for the forthcoming audit.

In addition, the committee is responsible for reviewing the Company’s internal financial controls and internal audit activities and it received and reviewed at the meetings reports of the internal audit activity during the year and the internal audit plan for 2009. The committee also reviewed the Group’s whistle blowing policy containing arrangements by which employees may, in confidence, raise concerns about possible improprieties in financial reporting or other matters.

The chairman of the audit committee reports to the full Board on matters of significance arising at meetings of the committee.

The audit committee is also responsible for making recommendations to the Board on the appointment or re-appointment of the external auditors, approving their remuneration and monitoring their independence and objectivity. At the meeting of the committee in February, the external auditors, Deloitte LLP, presented to the committee their policies and safeguards to ensure their independence within the meaning of all regulatory and professional requirements and that the objectivity of the audit engagement partner and audit staff is not impaired. Those policies and safeguards, together with the Company’s own policy on engaging the external auditors for non-audit work, enabled the committee to confirm that it was satisfied with Deloitte LLP’s continued independence and objectivity.

The Company’s policy on the engagement of the external auditors for non-audit related services provides that where the fees for such services would exceed either an absolute limit or a specified proportion of the audit fee, they should be referred to the committee for approval. Any such services below the threshold have to be approved by the finance director. No non-audit services to the Company provided by Deloitte LLP in 2008 required the approval of the committee. The fees for non-audit services during the year are set out in note 2 of the consolidated financial statements. These represented approximately 15% of the audit fee and comprised taxation services to joint ventures. The committee has reviewed the nature of the work and level of fees for these services and concluded that this has not affected the objectivity or the independence of the external auditors.

Internal control statement

The Board acknowledges that it has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The internal control system is designed to manage rather than eliminate the risk of failure to achieve certain business objectives. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. The system of internal control, which includes financial, operational and compliance controls, is based on a process of identifying, evaluating and managing risks. It accords with the guidance in the Turnbull Report and was in place for the year under review, and up to the date of approval of the annual report and accounts.

The key features of the Group’s system of internal control are as follows:

Group structure

The Group’s operating structure comprises Group Activities and five operating divisions, each with its own management board which is given authority and responsibility for managing its division within a framework of overarching Group policies, reporting lines and detailed delegated authorities, which ensure that decisions and approvals are made at the appropriate level. Whilst responsibility for managing each division is delegated to the individual management team as far as practicable, responsibility for certain of the Group’s key functions, including treasury, pensions and insurance, is retained at Group level.

Financial information

The Board recognises that an essential part of the responsibility for running a business is the effective safeguarding of assets, the proper recognition of liabilities and the accurate reporting of profits. The Group has a comprehensive budgeting and forecasting system in place which is regularly reviewed and updated, together with a management reporting system established in each division for monthly reporting to the Board. In addition, the internal audit plan for the year includes specific financial reviews to validate the integrity of the division’s management accounts.

Investment and capital expenditure

There are detailed procedures and defined levels of authority in relation to investment, capital expenditure, significant cost commitments and asset disposals with approvals required from the Board, the executive directors or divisional boards depending on the value or nature of the investment or contract.

Tenders and project selection

Individual tenders or projects are subject to detailed review, with approvals required at relevant levels at various stages from commencement of the bidding process through to contract award. As part of this process, the financial standing of both clients and key sub-contractors is assessed.

Contract controls

Robust procedures exist to manage the ongoing risks associated with contracts with monthly reviews at an appropriate level of each contract’s performance covering both financial and operational issues.

Working capital management

The Group continually monitors current and forecast cash and working capital balances through a regime of daily and monthly reporting.

Health, safety and environment

Monthly reporting to the Board includes a report on the Group’s performance in relation to health and safety matters and environmental compliance.

Risk management

The Board has reserved to itself specific responsibility for the formulation of the risk management strategy of the Group. A formal process is in place through which the Group identifies the significant risks attached to its strategy and objectives, confirms the control strategy for each risk and identifies the appropriate early warning mechanisms and actions required. Internal control and risk management systems are embedded in the operations of the divisions. A consolidated report of each of the divisional risk reviews together with risks identified at Group level are compiled in a Group risk register, which is updated and reviewed by the Board twice yearly. The principal risks identified as facing the Group are highlighted in the business review.

Audit and assurance

The group head of audit and assurance, who reports to the chief executive and to the audit committee, is responsible for managing the audit and assurance function, overseeing the divisional heads of internal audit and assisting with risk management practices. Internal audit and assurance work carried out during the year included operational, project and financial reviews across the key business units within the Group. The results of these reviews were recorded in audit reports and presented to the audit committee. The status of agreed management actions to address identified operational weaknesses is actively tracked until implementation.

The audit and assurance team has been extended during the year across the key operating divisions. The team will focus its attention in 2009 on the higher risk business areas and major projects, whilst ensuring a balanced level of review across all operating divisions.

The internal audit process is supplemented by a rolling programme of peer group reviews within the divisions, which assist in the professional development of the individual staff concerned while at the same time providing a mechanism for the cross-fertilisation of ideas and best practice throughout the divisions. These reviews are overseen by the divisional heads of internal audit and tracking of agreed management actions is included within the overall internal audit process.

The Board has conducted a review of the effectiveness of the system of internal control for the year ended 31 December 2008 and for the period to the date of this report. The process included a formal review conducted by the Board of the Group risk register, referred to under risk management above, as well as a review of the results of internal audit work and the overall effectiveness of the process.