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). The Code is available on the Financial Reporting Council’s website www.frc.org.uk.

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 2014.

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 Robert Kennedy, Chief Financial Officer (CFO) from 16 October 2013. The Non-executive Directors comprised Dr Peter Fellner, John Goddard, Dr Peter Kehoe, David Wilson and Rosalyn Wilton.

 As at 30 September 2014, 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 2014 without the presence of Executive Directors.

Board Process and Information

The Board met nine 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 2014 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 2014 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

Audit
5

Remuneration

Nomination
1

Dr Peter Fellner

9/9

— 

4/4

1/1

Roy Davis

9/9

 Robert Kennedy

9/9 

— 

— 

John Goddard

9/9

5/5

1/1

Dr Peter Kehoe

9/9

5/5 

4/4

1/1

David Wilson

8/9

5/5 

4/4

1/1

Rosalyn Wilton

9/9

4/4

1/1

 Appointments and Resignations

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.

Report of the Aufdit Committee

The primary objectives of the Audit Committee are the provision of effective governance of the appropriateness of the financial reporting and the performance of the external Auditor. Its main responsibilities are:

  • planning and reviewing the Company’s interim and preliminary reports and accounts
  • Reporting to the Board on the appropriateness and consistency of accounting policies
  • Reviewing key judgement areas
  • Advising the Board on whether the Committee believes the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable
  • Overseeing the relationship with the external Auditor

The ultimate responsibility for reviewing and approving the Company’s interim and preliminary reports and accounts remains with the Board on the recommendation from the Committee.

The Committee has been selected with the aim of providing appropriate experience and expertise to fulfil the Committee’s duties. It is chaired by John Goddard and its other members included Peter Kehoe (from 1 June 2013) and David Wilson (from 15 May 2013). The Company Secretary serves as secretary to the Audit Committee.

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 2014 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 2014 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. Included within this is a review of the asset life as this is a key determinant as to whether an rental is considered to be a finance lease. The Committee reviewed the basis of the management judgement and were satisfied that 4 years remains an appropriate asset life for Daytona and that the life of P200 and P200 DX should remain as 30 Sept 15. The Committee agreed, based on a recommendation from management that given the current new product plan it was appropriate to fix the life of the COE products to end 30 Sept 2016, to be effective from 1 October 2015. The Committee, based on feedback from management and EY, confirmed the appropriate revenue recognition policies were applied.
  • Segmental reporting: The Committee reviewed the appropriateness of the Company’s segmental reporting. After reviewing the changes within the organisation and the reporting information provided it was concluded that the current segmental split no longer reflects how the business is managed and therefore offers no additional useful information to the users of the Statutory Accounts. It was therefore agreed, in consultation with EY, that the current segmental note based on geographical split be replaced with the new single segment disclosure note and that the disclosure note on Goodwill impairment be updated to reflect the effect this has on the level that impairment testing is performed at. To comply with the standard’s requirements on the entity wide disclosures a geographical split of revenue will now be reported in the segmental note and additional information on the customer base where required. This change was effective from 1 October 2013.
  • Impairment of intangible assets: It was agreed that it was appropriate to impair the OPKO technology asset given its reduced life and expected recoverable amount.
  • Going Concern; The Company put into place new financing facilities in January 2013 and during FY13 has significantly reduced its debt level, given this the Committee were 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.
  • Exceptional items: The Committee reviewed the appropriateness of the exceptional items within the accounts in particular the adverse exchange rate charge relating primarily to the balance sheet movement on intercompany loans. This charge was the result of exceptional exchange rate movements that occurred in the final quarter of the year. It was felt to be exceptional in nature, however given the recurrence of these exchange differences it was decided, in consultation with EY, that this cost should be classified as a separately disclosed item rather than exceptional and that going forward it would be captured in this way. 

II. Risk management and internal control

The risk assessment approach was revised and documented in April 2013, with a review of risks and corrective actions undertaken twice a year. Using a bottom up approach, the risk register is reviewed and updated by the individual functions with input from the Executive Team. This, along with input from the Board’s strategic review forms the basis of the principle risk disclosure in the annual accounts. This can be found on pages 32 to 34.

The Committee reviewed the updated Risk Register. It also reviewed internal controls including reviewing the need for an internal audit function. It was concluded than an external internal audit process is not required at this time.

A specific area covered in detail was the Company’s policy in relation to exchange rate hedging following discussion over a number of meetings anew policy was agreed for implementation in the FY15 financial year.

III. Tax

The Committee reviewed updates on the Company’s tax position and strategy including a detailed presentation from PwC, the Company’s tax advisers. This included a review and then approval of an updated transfer pricing policy.

There were also discussions on the changing tax environment globally as well as specific UK developments including R&D and patent box.

IV. External audit

We receive from Ernst and Young LLP (EY) a detailed audit plan identifying their assessment of key risks. For the 2013/14 financial year the primary risks were: accounting for leases/customer contract terms and revenue recognition (cut off). 

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 FY14, 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 hold a private meeting at least once a year to provide an additional opportunity for feedback without the Executive Directors being present.

In accordance with their Terms of Reference, 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. Annie Graham commenced in her role as Senior Statutory Auditor in 2013. The Auditor 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 again 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 totender. The amount paid for non-audit work during the year is set out in Note 5 to the Financial Statements on page 93.

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

Report of the Nomination Committee

The Nomination Committee has responsibility to assist the Board with succession planning and with the selection process for the appointment of a new Director or Chairman. The Nomination Committee is chaired by the Chairman of the Board and is composed of all Non-executive Directors. The Chairman of the Board serves as Secretary to the Committee.

All members of the Committee are independent within the meaning of the Code. The Code states that the test of independence is inappropriate to the Chairman of the Board. Dr Fellner fulfilled the independence criteria at the time of his appointment.

The principal responsibilities of the Nomination Committee are as follows: evaluate the Board in terms of balance of skills, experience, independence and knowledge of the Company, its diversity (including gender), how the Board works together as a unit, and other factors relevant to its effectiveness; following this evaluation prepare a description of the role and requisite capabilities required for a particular appointment; assess the time commitment expected on the part of the Chairman of the Company and to require Non-executive Directors to undertake that they will have sufficient time to meet their commitments to the Company; oversee the search process for suitably qualified Nonexecutive Directors as and when required, using outside advisers as the Nomination Committee may determine as appropriate; and arrange for all members of the Nomination Committee to meet the preferred candidate prior to making a formal recommendation to the Board.

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. As at 30 September 2014, the gender representation on the Board constituted 14% women: 86% men.

The main activities of the Nomination Committee during the financial year ended 30 September 2014 included contribution and commitment of the Directors standing for re-election.

The number of meetings held during the financial year ended 30 September 2014 and the attendance record at these meetings is set out on page 48.

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. As part of this review the Directors considered the current level of debt and available deb facilities. There are several financing option available to the Company including an undrawn $30m revolving credit facility as well as vendor financing. 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
18 November 2014