Corporate governance report

The Board is committed to the highest standards of corporate governance. It recognises that it is accountable to the Company’s shareholders for good governance, to facilitate efficient and effective management in order to deliver shareholder value over the long term, within appropriately established risk parameters. The principal governance rules applying to UK companies listed on the London Stock Exchange are contained in the Combined Code on Corporate Governance (the “Code”), as adopted by the Financial Reporting Council (www.frc.org.uk/corporate) and most recently revised in June 2008. This report, together with the Directors’ report and the Remuneration report, describes how the Board applied the principles of good governance, as contained in section 1 of the Code, and seeks to demonstrate how those principles have been applied, and continue to be applied, during the year under review.

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The Board meets regularly during the year, as well as on an ad hoc basis as required by time critical business needs. During the year, the Company held additional Board and Board Committee meetings principally to consider and approve the technical aspects of the share placing and rights issue which was completed in April 2009; further details of this transaction are in Group at a glance. The Board’s primary role is to provide effective and entrepreneurial leadership necessary to enable the Group’s business objectives to be met and to review the overall strategic development of the Group as a whole. It has a formal schedule of matters reserved to it for its decision while day-to-day operational decisions are managed by the Executive Committee as outlined below.

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As at 31 July 2009, the Board of Directors was made up of nine members consisting of the Chairman, four Executive Directors and four Non Executive Directors. The Chairman and the Non Executive Directors are each considered by the Board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement including the Chairman, despite the longevity of his tenure on the Board. The Board considers that each of the Non Executive Directors brings his own senior level of experience and expertise. In furtherance of the Board’s objective to maintain the strength and breadth of expertise and experience on the Board, two additional Non Executive Directors will join the Board during the next financial year. Alain Le Goff has been appointed with effect from 1 September 2009 and Michael Wareing with effect from 1 October 2009. Additionally, Mr Wareing will take over from Mr Murray as chairman of the Audit Committee with effect from 1 January 2010. Biographical details of the Directors currently in office, as well as for the two new appointments are shown in Our Board. The Company’s policy relating to the terms of appointment and the remuneration of both the Executive and Non Executive Directors is detailed in the Remuneration report. The distinct roles of Chairman and Group Chief Executive are acknowledged, set out in writing and agreed by the Board. Although now permitted under the Code, the Chairman has confirmed that he does not chair any other board of directors in the FTSE 100. Gareth Davis is the Company’s Senior Independent Director. His role includes being available for approach or representation from investors and shareholders, where communication through the Chairman or the Executive Directors may not seem appropriate. The Nominations Committee, as well as the Board as a whole, considers succession planning and the appropriate composition of the Board.

The Company’s Articles of Association provide that one-third of the Directors retire by rotation each year and that each Director will seek re-election by the shareholders at the Annual General Meeting at least once every three years. Additionally, new Directors are subject to election by shareholders at the first opportunity after their appointment. It is Board policy that Non Executive Directors are normally appointed for an initial term of three years, which is then reviewed and extended for up to a further two three-year periods. It is also Board policy that Non Executive Directors should not generally serve on the Board for more than nine years and that, in cases where it is proposed to exceed this period, the Director concerned will retire annually and offer himself for re-election. Details of the Directors seeking election and re-election at the 2009 Annual General Meeting are given below and in the Notice of Meeting.

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Brief particulars of the Directors in office at the date of this report in Our Board. The Directors offering themselves for re-election at the 2009 Annual General Meeting are Gareth Davis, Frank Roach and Nigel Stein. John Whybrow, having served on the Board for over nine years, is also standing for re-election. Each of these Directors, following a full performance evaluation during the year, continues to be considered by the Board to be effective and to demonstrate commitment to his respective role. In addition, following their respective Board appointments during the year, Ian Meakins, Alain Le Goff and Michael Wareing will each be standing for election.

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A 12-month rolling programme of items for discussion by the Board is prepared to ensure that all matters reserved and other key issues are considered at appropriate times. The Board met 12 times during the year and Director attendance for each meeting is shown in the table in meetings attendance. Together with the Group Chief Executive and the Company Secretary, the Chairman ensures that the Board is kept properly informed and is consulted on all matters reserved to it. Board papers and other information are delivered at times to allow Directors to be properly briefed in advance of meetings to ensure that they are provided with sufficient resources to undertake their duties.

The Board has established a procedure for Directors, if deemed necessary, to take independent professional advice at the Company’s expense in the furtherance of their duties. This is in addition to the direct access that every Director has to the Company Secretary, who is charged with ensuring that Board procedures are followed and that good corporate governance and compliance is implemented throughout the Group.

Following their appointment, formal comprehensive and tailored induction is offered to all Directors. This is supplemented by meetings, as required, with major shareholders, visits to key locations within the Group and meetings with members of the Executive Committee and other key senior executives. Meetings led by the Senior Independent Director between the Non Executive Directors, both with and without the presence of the Chairman and the Group Chief Executive, are scheduled in the Board’s annual timetable. The Board has also arranged to hold at least two Board meetings each year at operating locations to help all Board members gain a deeper understanding of the business, whilst also providing senior managers from across the Group the opportunity to present to the Board and to meet the Directors on more informal occasions.

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During the year, the Board conducted a full evaluation of its own performance and that of its Committees and individual Directors, with the assistance of an external facilitator. The evaluation was carried out to assess the quality of the Board’s decision-making, its overall contribution and value to the long-term benefit of the Company, and to its preparation for future challenges.

The facilitator carried out the evaluation process using a combination of comprehensive questionnaires, one-to-one interviews, observation of Board proceedings and a review of relevant Board and Committee papers. A consolidated report detailing the outcome of the evaluation exercise was prepared by the facilitator and presented to the Board for review and consideration. The evaluation report concluded that the Board, in comparison with other FTSE companies, rates highly in its effectiveness and in its engagement with and contribution to the business. A number of actions and improvements were identified for the medium to long term, including a recommendation to continue to address internal and external changes which could affect the business.

The Board and its Committees will continue to critically review their procedures, effectiveness and development throughout the year ahead and the Chairman has reiterated that should any Director have any concerns or observations which they wished to raise, these should be notified to him directly or to the Company Secretary, to be addressed appropriately.

As part of their ongoing development, the Executive Directors are encouraged to take up an external non executive position on the board of a non-competitor company, for which they may retain payments received in respect of such appointment. In order to avoid any conflict of interest, all appointments are subject to the Board’s approval and, generally, outside appointments for Executive Directors are limited to one company board. The Board monitors the extent of Directors’ other interests to ensure that the effectiveness of the Board is not compromised. Details of external directorships and any fees retained are shown in external directorships.

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In accordance with the Company’s Articles of Association, the Company has always indemnified its Directors to the maximum extent permitted by law in respect of liabilities incurred as a result of their office. Qualifying third-party indemnity provisions (as defined in section 234 of the Companies Act 2006) have been granted to all Directors in office and to the Company Secretary and these remain in force as at the date of this report. The Company has also arranged appropriate insurance coverage in respect of legal action against its Directors and Officers. Neither the Company’s indemnity nor insurance would provide any coverage to the extent that a Director is proved to have acted fraudulently or dishonestly.

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The formal terms of reference for the Board committees, approved by the Board and complying with the Code to assist in the discharge of its duties, are available from the Company Secretary and can also be found on the Company’s website at www.wolseley.com. Membership and activities of the various committees are summarised below. The Group Company Secretary, whose appointment and removal is a matter for the Board as a whole, acts as secretary to all Board committees.

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The Nominations Committee consists of Messrs Davis, Duff, Murray, Stein and Whybrow, who chairs the Committee. Messrs Le Goff and Wareing became members of the Committee on their respective dates of appointment. Mr Whybrow would not chair the Committee or attend if it were to consider the appointment of a successor Chairman. The Committee reviews the structure, size and composition of the Board and its committees and makes recommendations with regard to any changes that are considered necessary, both in the identification and nomination of new Directors and the continuation of existing Directors in office. The Committee retains external search consultants as appropriate, as was the case for the new appointments to the Board as noted in Our Board. The Committee also advises the Board on succession planning for Board appointments although the Board itself has overall responsibility for succession generally. The Committee meets as required and met six times during the year ending 31 July 2009. The matters discussed included the change of Chief Executive Officer, the appointment of two additional Non Executive Directors to the Board and changes to Committee membership. During the year, the Committee reviewed its terms of reference.

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The Committee consists of Messrs Davis, Stein and Duff, who chairs the Committee, all of whom are considered independent within the definition set out in the Code. Mr Whybrow stepped down from the Committee during the year. Whilst the Committee continues to consider Mr Whybrow as independent, it recognised that the length of his concurrent service on the Board with an Executive Director may appear to some observers to be inconsistent with that independence. The Committee met five times during the year and Director attendance for each meeting is shown in the table in meeting attendance below. The Committee has delegated authority to deal, on behalf of the Board, with all remuneration matters, including pension entitlements and any compensation payments. It is responsible for setting the remuneration of the Executive Directors and the Group Company Secretary in accordance with the remuneration policy approved by the Board. It is also responsible for determining the fees of the Chairman and for monitoring and approving the remuneration policy in relation to senior management below Board level. The Committee prepares, for the Board’s approval, the Remuneration report, which is presented to shareholders at each Annual General Meeting.

During the year, the Committee reviewed and updated its terms of reference. The chairman of the Committee attends the Annual General Meeting to respond to any questions shareholders may raise on the Committee’s activities.

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The Executive Directors of the Company together with the Group Chief Information Officer, the Director of Group Strategy and Investor Relations, the Group HR Director and the Group Company Secretary and General Counsel, meet at least eight times each year, usually prior to Board meetings. The Committee addresses operational business issues and is responsible for implementing strategy and Group policies, day-to-day management and monitoring business performance.

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The Committee currently consists of the Group Chief Executive, the Chief Financial Officer, who chairs the Committee, and the Group Treasurer. Mr Wareing will join the Committee following his appointment on 1 October 2009. Mr Harding, the Director of Group Strategy and Investor Relations, will also join the Committee on that date. The Committee’s role is to consider treasury policy, including financial structures and investments, tax strategy and hedging policies and certain transactions on behalf of the Group, within a framework delegated by the Board.

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The Committee consists of the Chairman, the Group Chief Executive, the Chief Financial Officer, who chairs the Committee, the Director of Communications and the Group Company Secretary and General Counsel. The Committee meets as required to deal with all matters relating to public announcements of the Company and, in particular, the Company’s obligations under the Listing and Disclosure Rules of the UK Listing Authority. The Committee also assists in the design, implementation and periodic evaluation of the Company’s disclosure controls and procedures.

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The following table shows the attendance of Directors at meetings of the Board, Audit, Remuneration and Nominations Committees held during the year:

a Chairman.
b Mr Whybrow stepped down from the Remuneration Committee in March 2009.

This table only shows those meetings which each Director attended as a member rather than as an invitee. Additional meetings were convened during the year at relatively short notice in relation to the share placing and rights issue. Owing to prior overseas business commitments which could not be re-scheduled at short notice, some Directors were not able to attend certain of those meetings.

Each year the Committee critically reviews its own performance and considers where improvements can be made. This year, the performance of the Committee was also evaluated in detail as part of the independent performance review, as referred above in Board evaluation. The Committee’s terms of reference were reviewed and updated during the year.

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The internal audit function is fully independent of the day-today operations of the Group. It is involved in the assessment of the quality of risk management and internal control and helps to promote and further develop effective risk management within the businesses. Certain internal audit assignments (such as those requiring specialist expertise) continue to be outsourced by the Head of Internal Audit to KPMG LLP as required. A policy has been established regarding the recruitment of staff from both KPMG LLP and PricewaterhouseCoopers LLP. The Head of Internal Audit attends all Audit Committee meetings in addition to having regular meetings with the chairman of that Committee. The Audit Committee reviews key performance indicators relating to the activity of the department.

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In a decentralised Group, where local management has considerable autonomy to run and develop their businesses, a well designed system of internal control is necessary to safeguard shareholders’ investment and the Company’s assets. The Directors have overall responsibility for the Group’s systems of internal control and for reviewing their effectiveness. In accordance with the guidance set out in the Turnbull Report “Internal Control: Guidance for Directors on the Combined Code”, an ongoing process has been established for identifying, managing and evaluating the risks faced by the Group, including reputational risk, and this has been in place for the full financial year and up to the date on which the financial statements were approved and is regularly reviewed by the Board.

These systems are designed to manage rather than eliminate business risk; safeguard the Group’s assets against material misstatement or loss; fairly report the Group’s performance and position; and to ensure compliance with relevant legislation, regulation and best practice, including that related to social, environmental and ethical matters. The systems provide reasonable, not absolute, assurance against material misstatement or loss and are reviewed by the Board regularly to deal with changing circumstances.

Summaries of the key financial risks inherent in the Group’s business are given in the Performance review and in note 29 . Risk assessment and evaluation is an integral part of the Group’s annual planning cycle. Each business documents the strategic objectives and the effectiveness of the Group’s systems of internal control and, as part of this review, each business area and function has been required to identify and document each significant risk, together with the mitigating actions implemented to manage, monitor and report to management on the effectiveness of actions taken.

Group operating companies also submit risk management and internal control representation letters biannually to the Chief Financial Officer, with comments on the control environment within their operations. The Chief Financial Officer summarises these submissions for the Audit Committee and the Executive Committee. The chairman of the Audit Committee reports to the Board on any matters which have arisen from the Committee’s review of the way in which the risk management and internal control processes have been applied, or any breakdowns in, or exceptions to, these procedures. These processes have been in place throughout the year ended 31 July 2009 and have continued to the date of this report. The Board has reviewed the effectiveness of the Group’s system of internal control for the year under review the principal control structures and processes in place across the Group are described in more detail below.

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The Board reviews its strategic plans and objectives annually and approves Group company budgets and strategies in light of these. Control is exercised at Group, continental, cluster and subsidiary board level through monthly monitoring of performance by comparison to budgets, forecasts and cash targets and by regular visits to Group companies by the Group Chief Executive, Chief Financial Officer and continental CEOs. The Board has formal procedures in place for the approval of investment, acquisition and disposal projects, with designated levels of authority, supported by post-investment review processes for major acquisitions or disposals and capital expenditure. The Board takes account of social, environmental and ethical matters in relation to the Group’s businesses when reviewing the risks faced by the Group. The Board is conscious of the effect such matters may have on the short- and long-term value of the Company.

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Whilst the Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness, it has delegated responsibility for the risk management process and internal control programme to the Chief Financial Officer. The detailed review of the risk management process and internal control has been delegated to the Audit Committee. During the financial year, the risk management programme was improved throughout the Group, with the introduction of an upgraded risk assessment and reporting process. This provides a more consistent analysis of risks, a more effective means of ensuring accountability, and a more rigorous means of measuring responses, identifying key risks and reviewing risk mitigation plans. The management team of each Group company is responsible for risk management and internal control within its own business and for ensuring compliance with the Group’s policies and procedures. Each Group company has appointed a risk director whose primary role in such capacity is to ensure compliance by local management with the Group’s risk management and internal control programme. Both the internal and external auditors have reviewed the overall approach adopted by the Group towards its risk management activities and the improvements made have also been taken into account so as to reinforce the Company’s internal control procedures. More information on the Group’s approach is set out out in risk management .

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The Company applied all of the principles set out in section 1 of the Code for the period under review and has, throughout the year, complied with the detailed provisions set out therein. The Company’s auditors, PricewaterhouseCoopers LLP, are required to review whether the above statement reflects the Company’s compliance with the nine provisions of the Code specified for their review by the Listing Rules of the UK Listing Authority and to report if it does not reflect such compliance. No such report has been made.

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At the date of this report the Company had received notification of the following material shareholdings pursuant to the Disclosure Rules and Transparency Rules:

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The Company places considerable importance on communication with its shareholders, including its employee shareholders. The Company has regular dialogue with institutional shareholders and meetings with shareholder representatives and promotes communication with private shareholders through attendance at the Annual General Meeting. The Group Chief Executive and Chief Financial Officer are closely involved in investor relations and a senior executive has day-to-day responsibility for such matters. The views of our major shareholders are reported to the Board by the Chief Financial Officer and by the Chairman and are discussed at its meetings. A key topic of discussion during the year was the Company’s capital raising transaction, which was successfully completed in April 2009, following approval by shareholders at a General Meeting held on 1 April 2009.

Contact with institutional shareholders and with financial analysts, brokers and the media is controlled by written guidelines to ensure the protection of sensitive information which could affect the Company’s share price and which has not already been made generally available to the Company’s shareholders. Contact is also maintained, when appropriate, with shareholders to discuss overall remuneration plans and policies. The Chairman also ensures that the Board as a whole maintains an appropriate dialogue with shareholders and, although the Non Executive Directors are not formally asked, at present, to meet the Company’s shareholders, their attendance at presentations of the Annual Full and Half Year Results is encouraged.

The Group’s Half Year and Annual Final Results, as well as all announcements issued to the London Stock Exchange, are published on the Company’s website, www.wolseley.com. During the year, the Company issued regular updates to the market and these, together with copies of presentations to analysts and interviews with the Group Chief Executive and Chief Financial Officer, are also posted on the Company’s website. The Annual Report and Accounts are available to all shareholders either in paper form or electronically and can be accessed via the Company’s website at www.wolseley.com or via Shareview, an internet service offered by the Company’s Registrars, as detailed in Shareholder information.

The Notice of the Annual General Meeting is circulated to all shareholders at least 20 working days before such meeting and it is Company policy not to combine resolutions to be proposed at general meetings. All shareholders are invited to the Company’s Annual General Meeting, at which they have the opportunity to put questions to the Board and it is standard practice to have the Senior Independent Director and the chairmen of the Audit, Nominations and Remuneration Committees available to answer questions. Some questions may not be answered at the meeting, should they not be in the interests of the Company, involve the disclosure of confidential information or would not be to the good order of the meeting. The Chairman may also nominate a Company representative to answer a specific question after the Annual General Meeting or refer the response to the Company’s website. The proxy votes received for and against each resolution, as well as abstentions which may be recorded on the proxy form accompanying the Notice of Meeting, are counted before the Annual General Meeting and the results are made available at the meeting after shareholders have voted on each resolution on a show of hands. The results are also announced to the London Stock Exchange and are published on the Company’s website shortly after the meeting.

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The resolutions to be proposed at the Annual General Meeting to be held on 18 November 2009, together with explanatory notes, appear in the Notice of Annual General Meeting which has been posted to each shareholder. This document is also available on the Company’s website at www.wolseley.com.

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