The Board of Legal & General Group Plc is committed to high standards of corporate governance. It supports the Combined Code on Corporate Governance (‘the Code’), which sets standards of good practice for UK listed companies.
This section of the Annual Report, together with the Directors’ Report, the Remuneration Report and the Nominations Committee Report, explains how Legal & General complies with the principles and relevant provisions of the Code.
The Board
The Board of Legal & General Group Plc is collectively responsible for determining the strategic direction of the Group and for ensuring that Legal & General meets its obligations to shareholders. During 2006, the Board met 11 times and also held a separate strategy event at an offsite location.
At each Board meeting, the directors receive a detailed briefing from a senior manager on an important business issue. This is designed not only to help non-executive directors develop a thorough understanding of key issues facing Legal & General, but also to allow non-executive directors to build working relationships with senior managers below Board level. The Board has a formal schedule of matters specifically reserved to it, including decisions on strategic issues, capital expenditure and material contracts. In addition, the Board regularly reviews major projects, considers operating and financial issues and monitors performance against plan. The Chairman, in conjunction with the Group Secretary, ensures that the Board receives the information it needs to discharge its duties.
Board Composition and Structure
As at 31 December 2006, the Board consisted of 13 directors. Biographies of all directors currently holding office appear on Board of Directors page.
The Board consists of a part-time non-executive Chairman, five executive directors and seven non-executive directors. Throughout 2006, the majority of directors were non-executive, all of whom (with the exception of the Chairman) the Board has determined to be independent in both character and judgement. Their diverse business experience and wide range of skills enable them to make a significant contribution at meetings of the Board and its Committees. Their remuneration consists only of fees and they do not participate in any performance-related pay arrangements. The terms and conditions of appointment of non-executive directors are available for inspection at the Company’s registered office and at the Annual General Meeting (AGM). Attendance records for all directors who have held office during the year appear on Board Attendance.
The following changes to the composition of the Board or to executive roles took place during 2006:
- On 1 January 2006, Tim Breedon, formerly Group Director (Investments), succeeded Sir David Prosser as Group Chief Executive
- Following a review of the structure of the UK business, Robin Phipps was appointed Group Executive Director, UK in March 2006. In May 2006, Kate Avery was appointed Group Executive Director (Wealth Management) and John Pollock was appointed Group Executive Director (Protection & Annuities).
- Barrie Morgans retired as a non-executive director at the AGM on 18 May 2006
- Rudy Markham was appointed as a non-executive director on 1 October 2006.
All the above changes have been achieved without undue disruption to the business.
The Chairman holds at least two meetings a year with the non-executive directors without executive directors being present. The Board has agreed a clear division of responsibilities between the Chairman and the Group Chief Executive. The roles of the Chairman, Group Chief Executive and directors are clearly defined so that no single individual has unrestricted powers of decision.
The Chairman, Sir Rob Margetts, is responsible for leadership of the Board and for ensuring effective communication with shareholders. As part of its regular evaluation, the Board considers the Chairman’s availability and his capacity to undertake his role, against the background of his other commitments. The Board remains satisfied that the Chairman continues to be able to fulfil the normal time commitments required of his role and has the personal commitment and capacity to make himself available when unforeseen circumstances arise. In September 2006, Sir Rob Margetts resigned as a director and Chairman of the BOC Group Plc.
The Group Chief Executive is responsible for the day to day management of the Group and implementation of the strategy approved by the Board. The Board delegates responsibility to the Group Chief Executive, who is supported by the executive directors and heads of specialist functions. Throughout 2006, the Group Chief Executive chaired the Management Committee, which consists of all executive directors, the Resources and International Director, and the Group Secretary.
Sir David Walker, Vice Chairman, is the senior independent director. The senior independent director is available to shareholders if they have concerns which cannot be resolved through the usual channels.
The Group Secretary, through the Chairman, is responsible for advising the Board on all governance matters and for ensuring good information flows within the Board. All directors have access to the advice and services of the Group Secretary, as well as external advice, as required, at the expense of the Group.
Board Evaluation
The Board and its directors participate in an annual evaluation process, the aim of which is to assess the effectiveness of the Board’s collective performance as well as the contributions of individual directors.
An externally facilitated evaluation is carried out in alternate years. In 2005, the process was facilitated by an external consultant from the London Business School. Consequently, the 2006 evaluation was conducted internally by means of questionnaires and interviews. All members of the Board participated in the 2006 process.
A summary of the key findings was provided to the Board by the Chairman. Overall, there was a high level of satisfaction with the way in which the Board functions and the changes implemented during the year. Feedback on individual performance was delivered to directors by the Chairman. In the case of the Chairman, feedback was delivered by the senior independent director.
Separate evaluations are carried out to assess the effectiveness of the Audit and Remuneration Committees.
In addition to the Board evaluation, executive directors are subject to an annual appraisal and to regular review of their performance by the Group Chief Executive. The Chairman conducts the annual appraisal, and the regular reviews of performance, of the Group Chief Executive.
Appointments to the Board
Appointments to the Board are the responsibility of the Board as a whole on the recommendation of the Nominations Committee.
All directors are subject to election by shareholders at the first AGM after their appointment and, thereafter, are subject to re-election once every three years. The removal and appointment of the Group Secretary are reserved to the Board.
Induction and Training
New directors participate in a formal induction programme tailored to their individual needs. The induction programme is designed to give directors an understanding of Legal & General, its business and the markets in which it operates. Introductory visits are arranged to Company sites and with key suppliers and stakeholders. All directors are required to maintain and develop their knowledge throughout their period of office. As part of its continuing training programme, Legal & General runs occasional training events solely for directors eg capital management and reserving.
In addition, all directors are invited to participate in Legal & General’s educational and business awareness seminars for senior management. Recent sessions have included, Age Discrimination Legislation and Doing Business in the UK.
Relations with Shareholders
The Board attaches high importance to maintaining good relationships with shareholders. There is regular dialogue with institutional shareholders. Care is exercised to ensure that any price-sensitive information is released at the same time to all shareholders, whether institutional or private. The Board regards the AGM as an important opportunity to communicate directly with private investors. Board members, including the chairmen of the Remuneration, Nominations and Audit Committees, attend the meeting and are available to answer questions.
Board Committees
The Board has a number of standing committees:
Audit Committee
The role and work of the Audit Committee.
Corporate Social Responsibility Committee
The role and work of the Corporate Social Responsibility Committee.
Nominations Committee
The role and work of the Nominations Committee.
Remuneration Committee
The role and work of the Remuneration Committee.
Group Risk and Compliance Committee (GRCC)
The role and work of the Group Risk and Compliance Committee.
Disclosure Committee
The Disclosure Committee advises the Board on the management and disclosure of insider information in accordance with the requirements of the Listing and Disclosure Rules. The Disclosure Committee is chaired by the Group Financial Controller and comprises the heads of specialist functions. It meets when circumstances dictate.
Internal Control
The Board has overall responsibility for the Group’s internal control systems and for monitoring their effectiveness. Implementation and maintenance of the internal control systems are the responsibility of the executive directors and senior management. The performance of internal control systems is reviewed regularly by the Audit Committee, the GRCC and the boards of subsidiary companies.
The Board regularly reviews actual and forecast performance of its businesses compared with their one year plans, as well as other key performance indicators.
Lines of responsibility and delegated authorities are clearly defined. The Group’s control policies and procedures are published on a dedicated intranet site, which is regularly updated and accessible throughout the Group. Directors are required to confirm compliance with these policies throughout the year. The results of this confirmation process are reported to the Audit Committee.
The Chairman and Group Chief Executive oversee the policies for employee selection, assessment and development and have direct involvement in senior management appointments. Succession planning and contingency arrangements are in place for senior management and have been reviewed by the Board. The Group seeks to conduct business in accordance with ethical principles and there is guidance for employees on the standards required.
The arrangements for establishing policies in respect of the key risks to the Group are set out below.
Review of Internal Control
The Combined Code requires directors to review and report to shareholders on the Group’s internal control systems, which include financial, operational and compliance controls, and risk management.
The Board has controls in place to identify, evaluate and manage significant risks faced by the company on an ongoing basis and for determining the effectiveness of the system of internal control. Where failings or weaknesses are identified, necessary actions are taken to remedy any such failings or weaknesses.
Established procedures, including those already described, are in place to comply with the Combined Code. The Board assesses the effectiveness of internal control systems on the basis of:
- Regular reports by management to the main operating boards and the Audit Committee, on the adequacy and effectiveness of internal control systems and significant control issues;
- The GRCC’s review of the continuous Groupwide process for formally identifying, evaluating and managing the significant risks to the achievement of the Group’s objectives;
- Compliance reports and presentations from the Director, Compliance, on at least a quarterly basis; and
- Presentations of the results of internal audits, by the Group Chief Internal Auditor, to the Audit Committee.
The Board takes regular account of the significance of social, environmental and ethical matters to the businesses of the Group.
The GRCC’s review of the significant risks to the Group includes these matters. The work of the Corporate Social Responsibility Committee, which is chaired by the Group Chief Executive, can be found in the Corporate Social Responsibility section.
The Group’s internal control systems are designed to manage, rather than eliminate, the risk of failure to meet business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. In assessing what constitutes reasonable assurance, the Board has regard to materiality and to the relationship between the cost of, and benefit from, internal control systems.
The results of the ongoing monitoring of financial, operational and compliance controls, and the risk management process, are reported to the Board. For 2006, the Board was able to conclude, with reasonable assurance, that appropriate internal control systems have been maintained throughout the year.
Internal Audit
Internal Audit advises management on the extent to which systems of internal control are adequate and effective to manage business risk, safeguard the Group’s resources, and ensure compliance with legal and regulatory requirements. It provides objective assurance on risk and control to senior management and the Board.
Internal Audit’s work is focused on areas of greatest risk to the Group as determined by a structured risk assessment process involving executive directors and senior managers. The output from this process is summarised in a plan which is presented to the Audit Committee. The Group Chief Internal Auditor reports regularly to the Group Chief Executive and to the Audit Committee.
Compliance
The Group Compliance function is responsible for oversight of the Group’s compliance with regulatory requirements and standards. This encompasses the provision of policy advice and guidance to the regulated firms, oversight of regulated firms’ compliance arrangements to assess whether firms have appropriate systems, procedures and controls in place to manage their permitted regulatory activities, and oversight of regulatory risks arising from authorised firms’ compliance responsibilities. The Director, Compliance, reports monthly to the GRCC and regularly to the Group Board.
Management of Risk
The Group, in the course of its business activities, is exposed to Insurance, Market, Credit, Liquidity, and Operational risks. Overall responsibility for the management of these risks is vested in the Group Board. To support it in this role, a risk framework is in place comprising formal committees, risk assessment processes and risk review functions. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of risks is being performed.
Committee Structure
Oversight of the risk management framework is performed on behalf of the Group Board by its sub-committee, the GRCC.The GRCC meets monthly and is chaired by the Group Chief Executive. All executive directors are members. In addition, senior managers drawn from across the Group are regular attendees. The Chairman of the Audit Committee and PricewaterhouseCoopers, as external auditors, have a standing invitation to attend.
The primary role of GRCC is to ensure there are appropriate processes in place across the Group to identify, assess, monitor and control critical risks facing the Group, including regulatory risks. It reports regularly to the Group Board and its minutes are provided to the Audit Committee.
The table below shows the sub committees of the GRCC that are in place. In addition, Risk and Compliance Committees (RCCs) are in place for each of the main operational business units of the Group. These committees are predominantly responsible for the oversight of the management of operational risks and regulation. RCCs formally report both to their operating boards and to the GRCC on a monthly basis. Management of risks arising from the Group’s overseas subsidiaries is performed by the Boards of the local holding companies, which provide reports to the GRCC.
| Committee | Role | Membership |
|---|---|---|
| Group Capital Committee | To assess the capital requirements (including the risk based capital requirements) of the Group; to monitor the sources of capital available to, meet these requirements and oversee the allocation of capital to firms. | Group Chief Executive, Group Director (Finance), Group Executive Director (Protection & Annuities) Group Actuary, Actuary (UK) |
| Counterparty Credit Committee | To set limits for the Group’s exposure to any single counterparty failure and to manage exposures within these established limits. | Group Director (Finance), Chief Executive Officer (LGIM), Group Treasurer |
| UK Asset and Liability Committee (ALCO) | To ensure that assets and liabilities for the UK insurance business are appropriately managed. | Group Director (Finance), Chief Executive Officer (LGIM), Actuary (UK), Managing Director (Portfolio Managers) |
| UK Pricing and Insurance Risk Committee | To ensure that products for the UK Group are appropriately designed and priced, that product legal risks are assessed and that appropriate processes are in place to identify, assess, monitor and, where deemed appropriate, reinsure risk. | Group Executive Director (Protection & Annuities), Group Actuary, Actuary (UK), Director (UK Finance) |
| Group Operational Risk Assessment Committee | To ensure consistency in approaches to operational risk management across the Group. | Group Director (Finance), Senior Finance and Risk Managers, Group Secretary |
Risk Assessment Processes
A continuous Groupwide process is in place formally identifying, evaluating and managing the significant risks to the achievement of the Group’s objectives. A standard approach is used to assess risks. Senior management and the Risk Review Functions (see below) review the output of the assessments. A Groupwide risk assessment process is used to determine the key risks within the Group reported to the GRCC.
Risk Review Functions
Group and firm level Risk Review Functions provide oversight of the risk management processes within the Group. A central risk function is responsible for setting the risk management framework and standards. Risk Review Functions in each of the business operating units manage the framework in line with these standards. Their responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of these changes on risks to business and the monitoring of the mitigating actions. The Risk Review Functions also ensure that risk committees are provided with meaningful risk reports and that there is appropriate information to assess risk issues.
Details of the categories of risk to the Group, and high-level management processes, are summarised below. More detailed analysis may be found in Principal Risks and Uncertainties and Note 51. The Group has defined policies for the management of its key risks, the operation of which are supported by Risk Review Functions and are independently confirmed by Group Internal Audit. The GRCC reviews and approves these policies.
Insurance Risk
Insurance risk is the risk arising from higher claims being experienced than was anticipated.
Insurance risk is implicit in the Group’s insurance business and arises as a consequence of the type and volume of new business written and the concentration of risk, in particular, policies, or groups of policies, subject to the same risks.
The Group controls its insurance exposures through policies and delegated authorities for underwriting, pricing and reinsurance. Pricing is based on assumptions, such as mortality and persistency, which have regard to past experience and to trends. Insurance exposures are further limited through reinsurance.
Market Risk
Market risk is the risk arising from fluctuations in interest and exchange rates, share prices and other relevant market prices. The investment policies for long term and other businesses have due regard to the nature of liabilities and guarantees and other embedded options given to policyholders. The interest rate risk of such liabilities is normally managed by investing in assets of similar duration, where possible. It is further managed by maintaining capital sufficient to cover the consequences of mismatch under a number of adverse scenarios and by the use of derivatives.
The Group is also potentially exposed to loss as a result of fluctuations in the value of, or income from, assets denominated in foreign currencies. Balance sheet foreign exchange translation exposure in respect of the Group’s international subsidiaries is actively managed in accordance with a policy, agreed by the Group Board, which allows between 25% and 75% of net foreign currency assets to be hedged.
Credit Risk
Credit risk is the risk that the Group is exposed to loss if another party fails to perform its financial obligations to the Group.
Credit risk is not sought in its own right. However, the investment of shareholders’ and policyholders’ monies requires credit risks to be taken. Exposure to credit risk also arises in the reinsurance of insurance contracts. Credit risk is managed through the setting and regular review of detailed counterparty credit and concentration limits. Compliance with these limits for investment and treasury transactions is monitored daily.
Liquidity Risk
Liquidity risk is the risk that the Group, though solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they fall due, or can secure them only at excessive cost.
A degree of liquidity risk is implicit in the Group’s businesses. Liquidity risk arises as a consequence of the uncertainty surrounding the value and timing of cash flows. The Group’s Treasury function manages liquidity to ensure the Group maintains sufficient liquid assets and standby facilities to meet a prudent estimate of its net cash outflows.
Operational Risk
Operational risk is the risk arising from inadequate or failed internal processes, people and systems, or from external events.
The Group identifies and assesses operational risk as part of its continuous risk assessment processes. RCCs ensure that appropriate policies and procedures are in place for these risks and that they are properly controlled. There are detailed procedures covering specific areas of operational risk.
Contagion Risk
The occurrence of a risk in one part of the Group may result in contagion risk elsewhere in the Group. Such matters are assessed and monitored by the GRCC.
Prudential Regulation of Insurance Business
Most of the activities of the Group relate to the businesses which are subject to prudential regulation and require management to operate in a sound and prudent manner. In the UK, the Financial Services and Markets Act 2000 (the Act) established the Financial Services Authority (FSA) as the regulator for most Group operations. The Act, in particular, requires long term insurance business to be written within long term insurance funds, for which the actuaries appointed under the Act have certain legal accountabilities. These actuaries are subject to the disciplines of professional conduct and guidance and have a reporting relationship to the directors of the relevant insurance company and to the FSA. The actuaries have access to their boards and must report fully and impartially on the financial condition of the funds, annually quantifying and confirming each fund’s liabilities and solvency position. The FSA receives a copy of these reports, which are also subject to audit and overall peer review.
Going Concern
The directors have prepared the financial statements on the going concern basis consistent with their view, formed after making appropriate enquiries, that the Group is operationally and financially robust.
Compliance with the Code
For the year ended 31 December 2006, the Company believes it complies with all principles and provisions of the Code to the extent applicable to Legal & General Group Plc except in relation to:
- Membership of the Remuneration Committee. The Combined Code was updated in June 2006 for the reporting periods commencing on or after 1 November 2006. One of the changes made was the removal of the restriction on the Chairman of the Board being appointed as a member of the Remuneration Committee. To enhance the membership of the Remuneration Committee, the Board anticipated this change and appointed Sir Rob Margetts as a member with effect from 12 December 2006.
- Proxy votes. In compliance with the Code, the level of proxies lodged on each resolution at the AGM was made known after it had been dealt with on a show of hands. However, shareholders may also have received copies of the proxy votes in papers distributed at the start of the meeting.
Board Attendance
The number of full Board meetings and Committee meetings attended by each director during the year was as follows:
| Scheduled Board Meetings | Remuneration Committee |
Audit Committee |
CSR Committee |
Nominations Committee |
Group
Risk and Compliance Committee |
|
|---|---|---|---|---|---|---|
| Sir Rob Margetts Non-executive (Chairman) |
11(11) | 3(3) | – | – | 3(3) | – |
| Tim Breedon Group Chief Executive |
11(11) | – | – | 3(3) | – | 12(12) |
| Andrew Palmer Executive director Group Director (Finance) |
11(11) | – | – | – | – | 12(12) |
| Kate Avery Executive director Group Executive Director (Wealth Management) |
11(11) | – | – | – | – | 10(12)1 |
| Robin Phipps Executive director Group Executive Director (UK) |
11(11) | – | – | – | – | 12(12) |
| John Pollock Executive director Group Executive Director (Protection & Annuities) |
11(11) | – | – | – | – | 10(12)1 |
| Frances Heaton Non-executive director |
10(11)1 | – | 4(4) | – | 3(3) | – |
| Beverley Hodson Non-executive director |
11(11) | 2(3)1 | – | – | 3(3) | – |
| Barrie Morgans Non-executive director2 |
3(4)1 | – | 2(4)1 | – | 0(1)1 | – |
| Rudy Markham Non-executive director3 |
0(3)3 | – | – | – | 1(1) | – |
| Ronaldo Schmitz Non-executive director |
8(11)1 | 3(3) | – | – | 3(3) | – |
| Henry Staunton Non-executive director (Chairman of the Audit Committee) |
11(11) | – | 4(4) | – | 3(3) | 9(12)4 |
| James Strachan Non-executive director |
10(11)1 | 3(3) | 4(4) | – | 3(3) | – |
| Sir David Walker Non-executive Vice Chairman, Chairman of the Remuneration Committee and Senior Independent Director |
11(11) | 3(3) | – | – | 3(3) | – |
- 1.
- Indicates that absence was agreed with the Chairman in advance.
- 2.
- Barrie Morgans retired from the Board on 18 May 2006.
- 3.
- It was known prior to Rudy Markham’s appointment on 1 October 2006, that he would be unable to attend Board meetings for the remainder of 2006. He did, however, attend the two day Group Board Strategy event in October 2006 and has also attended corporate induction sessions.
- 4.
- As Chairman of the Audit Committee, Henry Staunton has a standing invitation to attend the Group Risk & Compliance Committee but is not a member.