Corporate Governance

Combined Code

The Board of Directors (Board) remains committed to ensuring high standards of corporate governance are maintained and continues to manage the Company's affairs in accordance with the principles and provisions of The UK Corporate Governance Code (the Code) (September 2012).

Statement of Compliance

The Board considers that the Company has complied with the principles and provisions set out in the Code throughout the year ended 30 September 2013.

Board of Directors

The principal duty of the Board is to represent and protect the interests of the Company's shareholders by ensuring that the Company is well managed and operated in a way which is in the interests of its shareholders. The Board is responsible for oversight of the formulation and implementation of the strategy of the Company. The Board is also responsible for oversight of the Company's operations and has an obligation to keep informed of the Company's activities and appropriate policies and procedures in order to assist management in formulating, developing and implementing plans and serves as a body to review and provide advice to management on the operations of the Company. The Board is committed to reviewing its membership on a regular basis. The Chairman ensures that Board discussions are conducted taking all views into account so that no one individual Director or small group of Directors dominate the proceedings.

Chairman and Chief Executive Officer

There is a distinct and defined division of responsibilities between the Chairman and the Chief Executive Officer (CEO). The Chairman is primarily responsible for the effective working of the Board and the CEO is responsible for the operational management of the business and for the implementation of strategy as agreed by the Board. The division of responsibilities is reviewed annually by the Board.

Board Balance and Independence

During the accounting period the Board comprised, as Executive Directors, Roy Davis, Chief Executive Officer (CEO) and Louisa Burdett, Chief Financial Officer (CFO) until 17 July 2013. The Non-executive Directors comprised Dr Peter Fellner, Barry Rose (until 31 May 2013), John Goddard, Dr Peter Kehoe, David Wilson and Rosalyn Wilton.

As at 30 September 2013, all of the Non-executive Directors were independent as provided for by the Code.

Role of Non-Executive Directors

The Company's Non-executive Directors provide input to the business by contributing to the oversight function of the Board and to the development of the Company's strategy. Non-executive Directors are required to be satisfied that the financial information is accurate and that the internal controls and policies and procedures governing risk management are effective and appropriate. The Company's Non-executive Directors are available to shareholders. The Non-executive Directors met as a group on two occasions during the financial year ended 30 September 2013 without the presence of Executive Directors.

Board Process and Information

The Board met twelve times during the year, including once over a two-day period with senior management to focus on strategy and business planning. Dialogue occurs regularly between Directors outside of scheduled meetings. Meeting agendas include review and approval of minutes recorded of the previous meeting, matters arising, items for discussion, special items, items for note and any other business. Board materials are distributed by the Company Secretary normally not less than seven days in advance of meeting dates to allow Directors to adequately prepare for meetings. The Board receives operational and financial information to assist in monitoring and assessing the ongoing performance of the business on a monthly basis. This includes reports from the CEO, CFO and Company Secretary. The Board also schedules and reviews special items covering business critical areas during the year. The Executive with responsibility for the special item submits a written report covering the item, which is included in the Board materials, and attends the Board meeting by invitation for that part of the agenda to discuss the report in detail.

No one other than Directors and the Company Secretary is entitled to be present at Board meetings unless specifically invited to attend. In those instances when a Director has been unable to attend Board or Committee meetings, his or her comments on the papers for that meeting are communicated to the Chairman in advance so that they can be duly considered.

Functions of the Board

The Board acknowledges and accepts its statutory duties and in doing so encourages the long-term success of the Company by exercising independent judgement with respect to material strategic and operational issues; safeguarding corporate assets by reviewing the financial policies and affairs of the Company and overseeing the Company's financial reporting process and internal controls; reviewing of the adequacy of the Company's systems for compliance with all applicable laws and regulations; overseeing the Company's risk management process and ensuring that the Company has appropriate procedures in place to manage risks; and evaluating the effectiveness of the Board and its Committees at least annually. The Board delegates to the Company's Operating Board (which is chaired by the CEO and comprised of the Company's senior management and meets regularly), certain decisions, including implementing the strategy, operational plans and policies of the Company and the Company's subsidiary companies as determined by the Board; delivering the operating and financial results against budgets; and managing and controlling the allocation of capital, human and technical resources.

Senior Independent Director

The Code recommends that the Board should appoint one of its independent Non-executive Directors to serve as the Company's senior independent director (SID). David Wilson is the SID for the Company and is available to shareholders. Employees can contact the SID under the provisions set out in the Group's Whistle-Blowing Policy if they have concerns that have not been resolved through normal channels or for which contact through the normal channels is inappropriate.

Accountability and Audit

All Directors have accepted a duty of care and accountability to act in the interests of the Company. The Audit Committee has a particular role, acting independently from management, to ensure that the interests of shareholders are properly protected relative to financial reporting and internal control.

Risk Management and Internal Control

The Board confirms that there is an ongoing process for identifying, monitoring, evaluating and managing the Company's significant risks, that such a process has been in place for the year ended 30 September 2013 and up to the date of approval of the annual report and accounts, that it is regularly reviewed by the Board and that it accords with the internal control guidance for Directors relative to the Code.

The Directors acknowledge that they have overall responsibility for the Company's system of internal control and for reviewing its effectiveness. The Board continued to apply C.2 of the Code by establishing a continuous process for identifying, evaluating and managing the risks that are considered significant. Its system is designed to manage the risk and can only be a reasonable and not absolute assurance against material misstatement or loss.

A Group Risk and Control Framework has been established and includes a range of controls, including financial, operational and compliance. It is based principally on reviewing reports from management and considering whether significant risks are identified, evaluated, classified and controlled and ensuring that any significant weaknesses are promptly and properly remedied. This includes manuals of policies and procedures applicable to all material aspects of the business, a budgetary control system which includes monitoring actual performance against pre-determined plans, and the appointment of suitably qualified and experienced staff to execute on their agreed responsibilities.

External audit risk assessment and planning is in place. The Audit Committee considers and determines relevant action in respect of any control issues raised by either the Executive Directors or the external Auditor.

There is currently no dedicated internal audit function. The Directors review and determine the requirement for a dedicated internal audit function on an annual basis. The Directors have determined, based on the size and complexity of the Group, that a dedicated internal audit function is not currently required. If any specific internal control weakness is either perceived or identified, the Directors will engage an independent third party to carry out additional tests.

Performance Evaluation

The Board undertakes an evaluation of its own performance and that of its Committees and individual Directors, including an assessment of the effectiveness of the Chairman, Executive and Non-executive Directors and Company Secretary. During this evaluation, consideration is given to the balance of skills, experience, independence and knowledge of the Company, Board diversity (including gender), how the Board works together as a unit, and other factors relevant to its effectiveness.

A meeting in the financial year ended 30 September 2013 of the Company's Non-executive Directors under the leadership of the SID without the presence of the Chairman and Executive Directors to conduct a performance evaluation of the Chairman took place. The SID discussed the feedback with the Chairman.

Board and Committee Meeting Attendance

The Board and its Committees meet on a regular basis to discuss and agree matters which are specifically reserved to them for review and decision. Contact between Board and Committee meeting dates is carried out by the Directors as and when required to discuss and agree matters arising relative to addressing and advancing the business of the Company.

Number of meetings

Board
12

Audit
5

Remuneration
5

Nomination
4

Dr Peter Fellner

12/12

2/4(1)

5/5

4/4

Roy Davis

12/12

Louisa Burdett

10/10(2)

Barry Rose

6/8(3)

3/4(3)

2/3(3)

John Goddard

12/12

5/5

4/4

Dr Peter Kehoe

12/12

1/1(4)

5/5

4/4

David Wilson

11/12

2/2(5)

5/5

4/4

Rosalyn Wilton

10/12

5/5

4/4

1 Dr Fellner resigned from the Audit Committee on 1 June 2013.

2 Louisa Burdett resigned from the Board on 17 July 2013.

3 Barry Rose resigned from the Board on 31 May 2013.

4 Dr Peter Kehoe joined the Audit Committee on 1 June 2013.

5 David Wilson joined the Audit Committee on 15 May 2013.

Appointments and Resignations

Barry Rose resigned from the Board on 31 May 2013. Louisa Burdett resigned from the Board as Chief Financial Officer on 17 July 2013. Robert Kennedy was appointed to the Board as Chief Financial Officer on 16 October 2013.

Board Committees

The Board appoints the members of the Audit, Remuneration and Nomination Committees, each of which has the responsibility to assist the Board in its oversight capacity. The Committees meet at regularly scheduled times throughout the year and at any other time that may be necessary to assist the Board in executing its responsibilities.

Certain other individuals are invited to attend the Committee meetings when required and relevant to the proceedings. The written Terms of Reference setting out the duties and responsibilities of the Board and its Committees are reviewed and revised as may be necessary on an annual basis. Committee Terms of Reference are available from the Company Secretary or on the Company's website at www.optos.com.

Mr Goddard, Dr Kehoe and Mr Wilson are independent within the meaning of the Code. The Board considered all members of the Audit Committee throughout the year ended 30 September 2013 to be independent in character and judgement and in possession of the relevant business experience and requisite financial expertise.

The Committee meets at least four times during the year. Meetings are attended by Non-executives and, by invitation, the Chief Executive and Chief Financial Officer. Other relevant people from the business are also invited to attend certain meetings where required. Our external Auditor is also invited to each meeting.

The Committee assists the Board in carrying out its responsibilities in relation to the financial reporting requirements, risk management and the assessment of internal controls. It also manages the relationship with the external Auditor. At the meetings during the year the Committee focused on:

I. Financial reporting

The primary role of the Committee is to review the appropriateness of the half-year and annual financial statements, in particular:

  • the Company's accounting policies;
  • material areas in which significant judgement has been applied or there has been discussion with the external Auditor; and
  • whether the accounts are fair, balanced and understandable.

The full terms of reference of the Committee can be found on the Company's website.

The primary areas of judgement considered by the Committee and discussed with the external Auditor in relation to the 2013 accounts were as follows:

  • Revenue recognition including lease accounting and contract terms: The Committee reviewed the revenue recognition criteria in particular the point at which revenue is recognised and where appropriate the lease classification. This is also a key area of focus for Ernst & Young LLP (EY) testing. The Committee, based on feedback from management and EY, confirmed the appropriate revenue recognition policies were applied.
  • Asset life: The asset life is a key determinant of whether an rental is considered to be a finance lease, this is significant, in particular for the new Daytona device. The Committee reviewed the basis of the management judgement and were satisfied that four years is an appropriate asset life for all devices with the exception of the P200 and P200DX. The Committee agreed, based on a recommendation from management that given the current sales plan it was appropriate to extend the life of the P200 and P200 DX to 30 September 2015 effective from 1 October 2013. The proposed asset life was also reviewed by EY as part of the audit planning process.
  • Impairment of goodwill and intangible assets: The judgements relate largely to the assumptions used for the calculation of the value in use of the business. The values used were consistent with previously reviewed budgets and plans and therefore the Committee was comfortable with the assumptions. It was agreed that it was appropriate to write off the standalone OCT project given the decision not to pursue this development. The Committee was content with the goodwill value and value attributed to the remaining intangible assets. In addition this is a prime area of focus for EY who reported their findings to the Committee.
  • Going concern: The Company's current bank facility expires in September 2014 and therefore does not cover the full twelve months required. The Committee was content that based on the projected cash flows and the financing options available to the Company that it is appropriate to produce the accounts on a going concern basis. EY agreed with this conclusion.

II. Risk management and internal control

The Committee reviewed the results from a revised risk assessment process and the associated Risk Register, which is prepared and monitored by the Company's senior management and sets out the likelihood and potential impact of the significant risks faced by the Company. It also reviewed internal controls including reviewing and agreeing the need for an internal audit function. In addition it confirmed the adequacy of the Company's Whistle-Blowing Policy.

III. Tax

The Committee reviewed updates on the Company's tax position along with a presentation from PwC, the Company's tax advisers.

IV. External audit

We receive from EY a detailed audit plan identifying their assessment of key risks. For the 2012/13 financial year the primary risks were: accounting for leases/customer contract terms, revenue recognition, impairment of goodwill and intangible assets and risk of misstatement due to fraud and error.

We assess the effectiveness of the external audit process in relation to the audit plan and reporting received from EY based on this plan and the primary identified risks. We also receive feedback from management regarding the audit process. For FY13, both the Committee and management were satisfied that there had been the appropriate level of review and challenge throughout the audit process and therefore assessed the process to be good.

EY regularly update the Committee on the audit plan and progress, as well as technical updates when appropriate. The Committee holds a private meeting at least once a year to provide an additional opportunity for feedback without the Executive Directors being present.

The Committee considers the reappointment of the external Auditor including rotation of the audit partner, each year and also tests their independence on an ongoing basis. The Auditor is required to rotate the lead audit partner to the Company every five years and 2013 saw the commencement of Annie Graham's role as Senior Statutory Auditor, replacing Mark Harvey who had held the position since 2008. The Auditor themselves operates procedures to safeguard against the possibility that their objectivity and independence could be compromised. This includes the use of quality review partners, a technical review board (where appropriate) and annual independence review procedures. The Auditor also confirms their independence to the Committee at each meeting that they attend.

EY has been the Company's external Auditor since 1999. The Committee has considered the reappointment of the Auditor of the Company and recommended to the Board that EY be proposed for reappointment. The committee has considered the audit tendering provisions outlined in the Code. Although, given the size of the Company, it is not obliged to tender, the Committee will review this position annually.

In accordance with the Code, the Company maintains a policy on the engagement of the external Auditor with respect to the performance of non-audit related work. The policy also provides that any non-audit work involving a single expenditure of more than $0.2m must be assigned to tender. The amount paid for non-audit work during the year is set out in Note 5 to the Financial Statements on page 92.

During 2013, for historical reasons, EY carried out tax compliance work for the Australian subsidiary company; the amounts involved were immaterial.

The Company has a Code of Ethics which covers all appointments within the Group, with the interest of promoting a workplace that is free from discrimination or harassment based on race, colour, religion, gender or other factors that are unrelated to the Company's business interests.

The Board believes in the importance of diversity, including gender diversity, and the benefits that it can bring to the operation of an effective Board and the Company as a whole. The gender representation on the Board constituted 25% women and 75% men for the majority of the year.

The main activities of the Nomination Committee during the financial year ended 30 September 2013 included leading the selection process for and making recommendations to the Board regarding the role of Chief Financial Officer; and considering the contribution and commitment of the Directors standing for re-election.

During the year, Spencer Stuart was consulted regarding the search for a CFO. Spencer Stuart has no other connection with the Company.

The number of meetings held during the financial year ended 30 September 2013 and the attendance record at these meetings is set out on page 46.

Communication with shareholders

The Company believes in having an open and regular dialogue with shareholders to ensure that the goals, objectives and overall business strategy of the Company are communicated and understood. The Board supports the use of the Company's Annual General Meeting as a means for communicating with shareholders and encourages their participation.

The CEO and CFO make twice-yearly presentations following the Company's interim and preliminary results announcements. Hosting site visits and investor information days provides the investment community and shareholders with the opportunity to improve their understanding of the Company and its strategy.

During the year the Company issued interim management statements and pre-close trading statements relating to performance for a specified period of time and disclosed relevant business news through the Regulatory News Service. In accordance with the DTRs, the Company notifies the market of its total voting rights and issued share capital at the beginning of every month, covering the previous month, where an increase or decrease has occurred.

All Directors can be reached by contacting the Company Secretary at:

Optos plc
Queensferry House
Carnegie Campus
Enterprise Way
Dunfermline, Scotland
KY11 8GR

Company information is available from www.optos.com.

Going concern

The Directors, having reviewed the Group's budget for the next financial year and other longer-term plans, are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. As part of this review the Directors considered the current levels of available debt facilities and, although the current revolving credit facility expires in September 2014, there are several credit approved financing options available to the Company. Therefore it is appropriate to continue to adopt the going concern basis in preparing the accounts.

BY ORDER OF THE BOARD

Robert Kennedy
Chief Financial Officer and Company Secretary
20 November 2013