Chairman’s Corporate Governance Report
This Corporate Governance Report has been written with the Quoted Companies Alliance (“QCA”) Corporate Governance Code in mind. As Chairman of the Board of Directors, corporate governance is my responsibility.
By following the QCA code, my Board colleagues and I seek to ensure that the Company operates efficiently and effectively and communicates well, to promote confidence and trust in the Company’s Board and management. The Board aims to balance the interests and expectations of the Company’s many shareholders and stakeholders by observing a transparent set of rules, practices and processes. I believe that by adhering to this clear set of guidelines which clarify authority and responsibility, requiring constant measurement and review, the Company is best placed to manage risk and achieve a high level of performance, both of which are pre-requisites to the Company’s long-term success.
Corporate Governance Review
In January 2018 the London Stock Exchange’s AIM Rule 26 was amended to require all AIM quoted companies to give details of the corporate governance code that they have decided to apply, to explain how they comply with their chosen code, and, if they depart from the chosen code, to explain where and why. In my view, there are two obvious choices of code: the FRC’S UK Corporate Governance Code and the QCA’s Corporate Governance Code (the “QCA Code”). The latter has been drafted with SMEs in mind and the Board has chosen to apply it.
The Board has carried out a detailed review of the requirements of the QCA Code and AIM Rule 26, with respect to both its governance arrangements and practices, and its reporting. The key changes that have resulted from this review are:
- Adoption of the QCA Code and implementation of its “comply or explain provisions”
- An update to this Corporate Governance Report
- Updates to the Terms of reference for each Committee to the board and Matters reserved for the Board of Directors
- The addition to monthly reporting by the management team to the Board of Directors of a Risk Report
- Updates to Directors biographies to highlight the key skills each individual brings to the Board.
- Consideration by the Nominations Committee of the desired make-up of the Board of Directors, and the implementation of a transition and succession plan.
Corporate Governance Code
The QCA Code is based upon the principle that companies need to deliver growth in long-term shareholder value. This requires an efficient, effective and dynamic management framework and should be accompanied by good communication which helps to promote confidence and trust. The QCA Code takes key elements of good governance and applies them in a manner which is workable for the different needs of growing companies. It is constructed around ten broad principles and a set of disclosures. Companies are asked to provide an explanation of how they are meeting the principles through the prescribed disclosures. Where a company departs from the principles the board is asked to provide a well-reasoned explanation for doing so. The following section of this Corporate Governance Report seeks to provide this:
Principle 1 - Establish a strategy and business model which creates long-term value for shareholders
The Board reviews and re-sets the Company’s strategic goals annually. In 2017 the primary goals were established as:
- To increase the Company’s value to shareholders; and
- To replicate market penetration achieved in targeted clinical areas in the UK in all overseas markets.
Secondary objectives, goals and “game changing plays” form part of the strategic plan and make an essential contribution to how the Company will deliver medium to long-term growth.
The Company has a clear strategic plan set by the Board, including financial performance targets, an approach to risk and a vision of the values necessary and appropriate to achieve the plan. Via internal reporting and interaction between the Board, management and employees, there is company-wide understanding of how shareholder value will be derived from these principles.
The business strategy, financial targets and key risks are clearly stated within various sections of the Annual Report to ensure that Shareholders can see how the Board intends to deliver long term shareholder value.
Principle 2 - Seek to understand and meet shareholder needs and expectations
The Chief Executive Paul Swinney and Finance Director Liz Dixon are the key shareholder liaison contacts alongside the company’s public relations advisors Walbrook PR.
The Board actively engages with shareholders at least three times a year, each in a forum which allows management and the Board to hear investors’ views. The Company’s NOMAD and public relations advisor provide written investor feedback after all investor presentations and meetings. These are shared with the Board. Via communication with the Company’s NOMAD and its analyst, together with Regulatory News Service announcements and the Company’s Annual Report, the Board gauges investor sentiment, sets expectations and communicates the Company’s intentions. The Board sees all write ups on the Company by the financial press, monitors popular online blogs and has a series of online facilities in place that provide a conduit between the Company and shareholders.
Principle 3 - Take into account wider stakeholder and social responsibilities and their implications for long-term success
Management’s close day to day connection with employees combined with periodic engagement surveys, “town hall meetings”, and all-staff “Tristel and Me” education sessions, ensure good relations with, and between, employees. These activities allow employees to share their views on ways in which the company can improve products, processes and outcomes. The Board’s assessment is that the Company’s culture is positive, engaged and energetic, which is reflected in its achievement of its strategic goals.
An appropriate and positive relationship with suppliers and customers is a pre-requisite to the successful operation of the Company and exists in all areas of the business. The Company seeks to find innovative solutions to issues presented by customers which not only strengthens its good relations with those customers but provides immediate feedback allowing the Company to continually reevaluate its strategic positioning and product offering. Product design and development, which has been vital to the Company’s success and continues to be a key day to day function, is driven by the close understanding between management and end users of the Company’s products.
The management team works closely with regulators, key opinion leaders and authors of clinical guidelines in all countries, seeking counsel and working in cohort when appropriate. Effective connections and relationships are a key element of the “protective moat” referred to within the Company’s strategic plan. Post market surveillance and effective complaints handling are a pre-requisite of the Company’s quality accreditation.
Principle 4 - Embed effective risk management, considering both opportunities and threats, throughout the organisation
Business opportunities, wins, losses and threats are documented by the management team monthly and shared with the Board. Risks and their mitigating factors are also reported, with high risk situations immediately acted upon. Health & safety risk assessments are a high priority given the nature of the business as a chemical manufacturer, and are completed on a continual basis. Operational risks and uncertainties are discussed daily within the business in departmental meetings. A disaster recovery plan is in place and scenario planning events take place periodically, normally annually. Financial risks are considered by the Board at each Board meeting.
The Board gains assurance that the risk management and related control systems are effective through internal review and assessment, which is part of its continuous improvement strategy.
Principle 5 - Maintain the Board as a well-functioning, balanced team led by the Chair
The Board receives information and reporting from every geographical and functional part of the business, direct from the responsible individuals, each month. The information, which is always provided in a timely manner, is of a high quality and comprehensive, ensuring that the Board is well informed and has the tools to facilitate proper assessment of matters which require its insight and decision making.
The Board believes that there is an appropriate balance between Executive and Non-Executive Directors on the Board. Tom Jenkins is the Senior Independent Non-Executive Director, Bruno Holthof is a second Independent Non-Executive Director. All Directors are encouraged to foster an attitude of independence of character and judgement. That said, the Board does not currently comply with the QCA Code’s requirement that at least half of Directors of the Board should be independent Non-Executive Director. Given the size of the business, the Board considers that expanding the Board to appoint additional Directors purely for reasons of independence would not be in shareholders’ interests. However, in all new appointments the Board seeks to address the issue of independence.
The relevant experience, skills and personal qualities that each Directors brings to the Board are detailed within the Directors Biographies, published within the Remuneration Report. Each Director keeps their skillset up to date by reading relevant publications and attending external training and personal development courses and workshops.
Each Non-Executive Director is expected to give at least 16 days per annum to the Company’s business.
Principle 6 - Ensure that the Directors collectively have all appropriate skills, capabilities and experience
The Board consists of individuals with backgrounds and experience in publicly and privately-owned commerce, finance and manufacturing. Collectively, the Board’s members have a wide range of experience, personal qualities and capabilities. It is recognized that the Chairman being a major shareholder risk’s individual dominance of the Board; however, the Board’s view is that the appointment of independent NED’s mitigates this risk.
At present, the Board contains two Executive Directors, one male and one female, and four NED’s, all of whom are male. Given the size of the business, expansion of the Board to appoint additional Directors purely for reasons of diversity is not considered to be in shareholders’ best interests. In all new appointments the Board aims to appoint candidates who bring new and diverse attributes to its complexion.
In accordance with the QCA Code Non Executive Directors are only eligible to serve for up to 9 years. At each Annual General Meeting all other directors are, at the discretion of the Nominations Committee, put forward for re-election.
Paul Barnes has served as a NED for 8 years, prior to which he was an Executive Director.
Principle 7 - Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement
The performance and effectiveness of the Board, its committees and individual Directors is reviewed by the Chairman and the Board an ongoing basis. Training is available should a Director request it, or if the Chairman feels it is necessary. The performance of the Board is measured by the Chairman with reference to the Company’s achievement of its strategic goals.
Over the course of the past three years the Board has changed by addition, without rotation. This is considered acceptable as the Company has increased in size and complexity and Board members still have much to contribute. The existing Board size of six is large enough to allow a mix of backgrounds, views and capabilities, whilst still small enough to be dynamic and effective.
The Board is currently in the process of a succession review, as a result of the Chairman of The Board of Directors indicating his intention to step down at the Company’s Annual General Meeting in December 2018. The Board continually assesses the candidacy of Tristel staff with respect to succession planning for Executive Management and has in place a short-term plan to be instigated in the event of the loss or incapacity of either CEO or Finance Director.
Principle 8 - Promote a corporate culture that is based on ethical values and behaviour
The Board promotes a corporate culture that is based on sound ethical values and behavior through their own actions and words, and ensures that these are apparent and understood in every part of the business. They are embodied in three words which describe the core values of the Company: No-Nonsense, Considerate and Energetic. These values are applied consistently to employee personal development and training programs.
By adhering to these values the Board believes that the Company will maintain a healthy corporate culture, focusing upon what is important, whilst taking a balanced approached to achieving its goals. Infection prevention is a vital yet complex area of a healthcare, and hospitals can be reluctant to put their trust in new products and change. The Board feels that if an honest and straightforward approach is taken, whilst supporting customers through the process of adopting new products, the company can best achieve its goals.
The flat hierarchy of the company means that the Board can assess the state of Company’s culture easily, which it considers to be positive and spirited at present.
Principle 9 - Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board
Given that one of the Company’s core values is “no-nonsense”, the Board seeks to strike a balance between maintaining adequate governance without imposing structures that slow or weaken decision making and progress. The Company’s governance structures are fluid and have by necessity adapted over time, hand in hand with the changes to the business. The Board’s members are well informed, have access to all parts of the business, and are appropriately equipped through their own skills, experience and personality to make good business decisions.
Principle 10 - Communicate how the Company is governed and is performing by maintaining dialogue with shareholders and other relevant stakeholders
This Corporate Governance Report is included within the Corporate Governance section of the Tristel website and is reviewed and updated annually.
Board of Directors
The Company is controlled by the Board of Directors, which comprises two Executives, one of whom is the Chief Executive Officer, and four NEDs. The role of the Chief Executive Officer and Chairman are separate. The Executive Directors are full time employees of the Company; the NEDs are part time employees who are required to give at least 16 days per annum to their role.
All Directors can take independent advice to assist them in their duties if necessary.
The Board is responsible to shareholders for the proper management of the Company and meets formally at least eight times a year to set the overall direction and strategy of the Company, to review operating and financial performance and to consider and advise on senior management appointments. The Board also monitors and approves financial policy and budgets, including capital expenditure. All key operational decisions are subject to Board approval.
The company secretary is responsible for ensuring that Board procedures are followed and that all applicable rules and regulations are complied with. Liz Dixon, Finance Director, performs the role of company secretary, providing an internal advisory role to the Board. The QCA’s guidelines state that the role of Company Secretary should not be held by an Executive Director, and as such we do not comply with this requirement. It is the Board’s view that the size and complexity of the business does not necessitate a separate role of Company Secretary. Liz Dixon is supported and guided in this role by the Company’s legal advisors.
Board and Committee attendance
The Board met eight times during the year and its committees met a further 4 times in accordance with their terms of reference. The attendance of the Directors at these meetings is detailed below. On the occasions when a Director is unable to attend a meeting, any comments he has arising from the information pack circulated prior to the meeting are provided to the Chairman.
||Eligible to attend
The Board does not currently comply with the QCA Code’s requirement that the Chairman of the Board of Directors should not Chair any of the Committees to the Board. It is expected that Bruno Holthof, recently appointed as a Non_Executive Director, will chair the Nominations committee once he has become familiar with the Company.
Committees of the Board:
The Remuneration Committee operates under terms of reference which are reviewed annually, meeting at least once per year, and comprises all Non-Executive Directors under the chairmanship of David Orr. It reviews, inter alia, the performance of the Executive Directors and sets the scale and structure of their remuneration and basis of their service agreements, having due regard to the interests of the shareholders. The Remuneration Committee also determines the allocation of share options to Executive Directors. No Director has a service agreement exceeding one year. One of the policies of the Remuneration Committee is that no individual participates on discussions or decisions concerning his/her own remuneration. The Directors’ Remuneration Report is set out in the Annual Report where the work carried out during the past year is detailed.
The Audit Committee operates under terms of reference which are reviewed annually and comprises all Non-Executive Directors under the chairmanship of Tom Jenkins. It meets at least twice a year and, amongst other duties, overviews the monitoring of the Company’s internal controls, accounting policies and financial reporting, and provides a forum through which the external auditors report. It meets at least once a year with the external auditors without Executive management present.
The Company does not comply with the QCA’s requirement to publish a separate Audit Committee Report as it believes that the information provided within this Corporate Governance Report gives shareholders adequate information on the committee’s activities.
During the year the audit committee met on two occasions to:
- Meet with the Company’s external auditors to discuss findings and hear recommendations arising from the annual audit;
- Discuss with the Company’s external auditors matters such as compliance with accounting standard;
- Approve the terms of engagement and fees of the Company’s external auditors;
- Monitor the external auditor’s compliance with relevant ethical and professional guidance on the rotation of audit partners, the level of fees paid by the Company and other related requirements;
The Committee reported formally to the Board on proceedings after each meeting.
The Nominations Committee operates under terms of reference which are reviewed annually and comprises all Non-Executive Directors and one Executive Director, under the Chairmanship of Paul Barnes. The Committee meets at least once a year to consider the performance and effectiveness of the Board and its Directors; whether Directors retiring by rotation should be put forward for re-election at the Annual General Meeting; to consider succession planning for Directors and other senior executives; and to identify and nominate for the approval of the Board candidates to fill Board vacancies as and when they arise.
We have not engaged an external consultant to evaluate the effectiveness of the Board this year. An ongoing review of the Board’s collective performance and that of the individual Directors was carried out, based upon the following criteria:
- Strategy design, debate and decision making;
- Leadership style and technique;
- Goal setting, assignment of roles, responsibilities and resources;
- Monitoring, risk management and oversight;
The performance of the Board and its individual Directors is also viewed in the context of the Company’s achievement of its strategic goals. During the 2017-18 year these were:
- To meet analysts’ profit forecasts – finnCap profit before tax forecast for 2017-18 was £4.2m, which has been achieved.
- To meet the Company’s strategic financial goals of achieving at least £22.3m of sales by financial year 2019-20 – the company is on target to exceed this goal.
- To increase the Company’s value to shareholders – market capitalization has increased by £56.8m, from £81.4m to £138.2 during the 2017-18 year – this goal has been achieved
- To replicate the market penetration achieved in targeted clinical areas in the UK in all overseas markets. Whilst this is difficult to measure, the Company has achieved overseas sales growth of 19% which is clear evidence that solid good progress is being made towards this goal. I have concluded that the Board has performed effectively during the 2017-18 financial year.
Directors are subject to election by shareholders at the first opportunity after their appointment. In addition, all Board members retire at each Annual General Meeting, and at their own request alongside the recommendation of the Nominations Committee, are put forward for re-election. All Directors were recommended for re-election at the 2018 AGM bar Francisco Soler, Chairman who retired after 25 years with the Company.
Relations with shareholders
The Board considers effective communication with shareholders to be very important and encourages regular dialogue with both institutional and private investors The Board responds promptly to communications received verbally or in writing. Directors regularly attend meetings with both private and institutional shareholders and analysts throughout the year. Shareholders are given at least 21 days’ notice of the Annual General Meeting held in December and Shareholder Open Day held in July, at which shareholders are given the opportunity to discuss the development and performance of the Company. The Company’s website, www.tristel.com contains full details of its activities, press releases and other details, as well as share price details, share trading activities and Regulatory News Service (RNS) announcements.
Maintenance of a sound system of internal control
The Directors have overall responsibility for ensuring that the Company maintains a system of internal control to provide them with reasonable assurance that the assets of the Company are safeguarded, and that shareholders' investments are protected. The system includes internal controls appropriate for the Company’s size, and covers financial, operational, compliance (including health and safety) and risk management areas. There are limitations in any system of internal control, which can provide reasonable but not total assurance with respect to the preparation of financial information, the safeguarding of assets and the possibility of misstatement or loss.
The Board continually considers its policies regarding internal control, risk management and business reporting with respect to the major areas of the business and methods used to monitor and control them. In addition to financial risk, the reviews cover operational, commercial, regulatory and health and safety risks. The Board has concluded that an internal audit function is not justified at this juncture. However, this decision is continually reviewed as the operations of the Company develop.
The key procedures designed to provide an effective system of internal controls that are operating up to the date of sign-off of this report are set out below.
There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and authority.
The Company employs Directors and senior personnel with the appropriate knowledge and experience for a business engaged in activities in its field of operations and undertakes regular risk assessments and review of its activities.
The Company prepares detailed budget and working capital projections, which are approved annually by the Board and are maintained and updated regularly throughout the year. Detailed management accounts and cash flows are prepared monthly, as is a written commentary giving a comparison to budgets and prior years, identifying and explaining any significant variances.
Management of liquid resources
The Board is risk averse when investing any surplus cash funds. It considers that a minimum cash balance of £3 million is appropriate - providing adequate protection against unexpected events - for the current size of the business and seeks to adhere to this wherever possible and practicable. Cash exceeding this level, which cannot be used for earnings enhancing investment purposes, is returned to shareholders in the form of a special divided.
Interim Non-Executive Chairman