The board is committed to high standards of corporate governance and business integrity, which it believes are essential to maintaining the trust of investors and other stakeholders in the Group. The board provides leadership for the Group and is responsible for setting the Group’s strategic aims and standards of conduct, monitoring performance against the business plan and budget prepared by the executive directors and ensuring that the necessary financial and human resources are in place for it to meet its objectives. The board requires all directors and employees to act fairly, honestly and with integrity and they are all subject to a Code of Business Conduct and Ethics, a copy of which is published on the corporate website at www.arm.com. The board has a formal schedule of matters specifically reserved for its decision, which includes the approval of major business matters, policies and operating and capital expenditure budgets. The board is also responsible for sanctioning unusual commercial arrangements such as atypical licence agreements and investments. The board delegates authority to various committees that are constituted within written terms of reference and chaired by independent non-executive directors where required by the Combined Code. The Chairman has primary responsibility for running the board and the Chief Executive Officer has executive responsibilities for the operations and results of the Group and making proposals to the board for the strategic development of the Group. There are clear and documented divisions of accountability and responsibility for the roles of Chairman and Chief Executive Officer.
The Group complies, and complied throughout 2008, with the Combined Code 2006. There are three elements that make up the Group’s corporate governance framework: organisation and structure, the internal control framework and independent assurance. The remainder of this section together with the remuneration report detail how the Group has applied these principles and complies with the provisions of the Combined Code.
The Combined Code requires that at least half of the board, excluding the Chairman, should comprise independent non-executive directors and the board currently comprises six executive directors, six independent non-executive directors and the Chairman. The Chairman was regarded as independent at the time of his appointment. The executive directors are the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Technology Officer and the General Managers of the Processor and Physical IP Divisions, all of whom play significant roles in the day-to-day management of the business. The board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them. All directors complete conflicts of interest questionnaires and any planned changes in their directorships outside the Group are subject to prior approval by the board.
The board reviews the independence of the non-executive directors on appointment and at appropriate intervals and considers the six non-executive directors to be independent in character, judgement and behaviour, based on both participation and performance at board and committee meetings. There are no relationships or circumstances which are likely to affect the judgement of any of them. Jeremy Scudamore, who has a strong background in industry and commerce, is the senior independent director. In this role, he provides a communication channel between the Chairman and non-executive directors and is available to discuss matters with shareholders, if required. Lucio Lanza, John Scarisbrick and Young Sohn all have a broad understanding of the Group’s technology and the practices of major US-based technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds.
The beneficial interests of the directors in the share capital of the Company are set out on page 36. In the opinion of the board, these shareholdings do not detract from the non-executive directors’ independent status.
The table below shows directors’ attendance at scheduled meetings and conference calls or ad hoc meetings which they were eligible to attend during the 2008 financial year:
* John Scarisbrick was appointed to the remuneration committee on 24 September 2008.
In the event that directors are unable to attend a meeting or a conference call they receive and read the papers for consideration at that meeting and have the opportunity to relay their comments and if necessary to follow up with the Chairman or the Chief Executive Officer after the meeting. During 2008, the Chairman held at least two meetings with the non-executive directors without the executives present and the non-executive directors met on at least one occasion without the Chairman being present
The directors have the benefit of directors’ and officers’ liability insurance and there is an established procedure for individual directors, who consider it necessary in the furtherance of their duties, to obtain independent professional advice at the Group’s expense. In addition, all members of the board have access to the advice of the Company Secretary.
Before each meeting, the board is furnished with information concerning the state of the business and its performance in a form and of a quality appropriate for it to discharge its duties. The ultimate responsibility for reviewing and approving the annual report and accounts and the quarterly reports, and for ensuring that they present a balanced assessment of the Group’s position, lies with the board. The board delegates day-to-day responsibility for managing the Group to the executive committee and has a number of other committees, details of which are set out below.
The board makes considerable efforts to establish and maintain good relationships with shareholders. The main channel of communication continues to be through the Chief Executive Officer, the Chief Financial Officer and the Director of Investor Relations, although the Chairman, the senior independent director and the other non-executive directors remain willing to engage in dialogue with major shareholders as appropriate.
There is regular dialogue with institutional shareholders throughout the year other than during close periods. The board also encourages communication with private investors and part of the Group’s website is dedicated to providing accurate and timely information for all investors including comprehensive information about the business, its Partners and products, all press releases, RNS and Securities and Exchange Commission (SEC) announcements. At present, around 20 analysts write research reports on the Group and their details appear on the Group’s website. Shareholders can also obtain telephone numbers from the website, enabling them to listen to earnings presentations and audio conference calls with analysts; and in addition, webcasts or audiocasts of key presentations are made available through the website. Members of the board, including some of the non-executive directors, attend the annual analyst and investor day and develop an understanding of the views of major shareholders through any direct contact that may be initiated by shareholders, or through analysts’ and brokers’ briefings. The board also receives feedback from the Group’s brokers and financial PR advisers, who obtain feedback from analysts and brokers following investor roadshows. All shareholders may register to receive the Group’s press releases via the internet.
The board actively encourages participation at the Annual General Meeting, scheduled for 14 May 2009, which is the principal forum for dialogue with private shareholders. A presentation is made outlining recent developments in the business and an open question-and-answer session follows to enable shareholders to ask questions about the business in general.
The resolutions put to shareholders at the meeting and the voting results will be published via RNS and the SEC and will be available on the Group’s website.
The board undertakes an annual board evaluation. During 2008, this exercise was conducted internally with each director completing a questionnaire and was led by the Chairman and facilitated by the Company Secretary. The evaluation covered board performance, processes, committees, composition, skills and director induction. The overall conclusion was that individual board members are satisfied that the board works well. They are also satisfied with the contribution made by their colleagues and that board committees operate properly and efficiently. Various recommendations resulted from the evaluation which have been discussed by the board and will be acted upon by the board in 2009, as appropriate. In particular, time is now allocated at board meetings and conference calls for discussions between the non-executive directors with and without the Chairman present and the Chairman will meet regularly with members of the executive committee in 2009. Further, the Chief Executive Officer will meet each non-executive director individually at least once per year. It is intended that there will be a further board evaluation each year, involving external consultants as and when the board deems appropriate.
A full, formal induction programme is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Group and its activities. The Group has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the Group’s expense.
The executive committee is responsible for implementing the strategy approved by the board. Among other things, this committee is responsible for ensuring that the Group’s budget and forecasts are properly prepared, that targets are met, and for generally managing and developing the business within the overall budget. Variations from the budget and changes in strategy require approval from the main board of the Group. The executive committee, which meets monthly, comprises the Chief Executive Officer, Chief Financial Officer, the President, the Chief Operating Officer, the Chief Technology Officer, the General Managers of the Processor, Physical IP, System Design and Media Processing Divisions, the EVP Human Resources, the General Counsel, the EVP Sales, the VP Marketing and the Company Secretary and meetings are attended by other senior operational personnel, as appropriate. Biographies of the members of the executive committee appear on the Group’s website.
The audit committee has written terms of reference which are published on the corporate website at www.arm.com. The committee has responsibility for, among other things, monitoring the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance and for reviewing any significant financial reporting judgements contained in them; reviewing the effectiveness of the Group’s internal controls over financial reporting and providing oversight of the Group’s risk management systems; making recommendations to the board in relation to the appointment, remuneration and resignation or dismissal of the Group’s external auditors; reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process; developing and implementing policy on the engagement of the external auditors to supply non-audit services and considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Services Authority and the requirements of the SEC.
There is a procedure in place for employees to report areas of concern to management in confidence and, if they prefer, anonymously through a third-party telephone line. The committee receives any such confidential reports from the compliance committee. Two whistleblowing incidents were reported in 2008, both of which were fully investigated and the committee is satisfied that there has been no breach of policies and procedures and that any appropriate remedial action has been taken. There have been no other whistleblowing reports up to 20 March 2009 being the latest practicable date before the printing of this report.
The committee also keeps under review the value for money of the audit and the nature, extent and cost-effectiveness of the non-audit services provided by the auditors. The committee has discussed with the external auditors their independence, and has received and reviewed written disclosures from the external auditors as required by the Auditing Practices Board’s International Standard on Auditing (ISA) (UK and Ireland) 260 “Communication of audit matters with those charged with governance”, as well as those required by the US Independence Standards Board’s Standard No. 1, “Independence discussions with audit committees”. To avoid the possibility of the auditors’ objectivity and independence being compromised, the Group’s tax consulting work is carried out by the auditors only in cases where they are best suited to perform the work. In other cases, the Group has engaged another independent firm of accountants to perform tax consulting work. The Group does not normally award general consulting work to the auditors. From time to time, however, the Group will engage the auditors to perform work on matters relating to human resources and royalty audits. The Group may also seek professional advice from another firm of independent consultants or its legal advisers.
The current audit committee comprises Philip Rowley (Chairman), Kathleen O’Donovan, Lucio Lanza, Jeremy Scudamore and Young Sohn. Philip Rowley is the financial expert as defined in the Sarbanes-Oxley Act 2002 (US) and Kathleen O’Donovan is also qualified to fulfil this role. Both have recent and relevant financial expertise. The external auditors, Chief Executive Officer, Chief Financial Officer and the Company Secretary attend all meetings in order to ensure that all the information required by the audit committee for it to operate effectively is available. Representatives of the Group’s external auditors meet with the audit committee at least once a year without any executive directors being present.
A description of the composition, responsibility and operation of the remuneration committee is set out in the remuneration report on page 33. The terms of reference of the remuneration committee are published on the Group’s website at www.arm.com.
The nomination committee leads the process for board appointments and makes recommendations to the board in relation to new appointments of executive and non-executive directors and on succession planning, board composition and balance. The terms of reference of the nomination committee are published on the Group’s website at www.arm.com. It is chaired by Doug Dunn and the other members are John Scarisbrick, Lucio Lanza and Philip Rowley. The committee considers the roles and capabilities required for each new appointment, based on an evaluation of the skills and experience of the existing directors. In relation to the appointment of new directors, the services of external search consultancies are generally used. There were no new appointments to the board during 2008.
The Group fully complies with the Combined Code’s provisions on internal control, having established procedures to implement the guidance in the Turnbull Report (2005). The board has established a continuous process for identifying, evaluating and managing the significant risks faced by the Group. The board confirms that the necessary actions have been or are being taken to remedy any significant failings or weaknesses identified from this process.
The board of directors has overall responsibility for ensuring that the Group maintains an adequate system of internal control and risk management and for reviewing its effectiveness. Building on the successful achievement of compliance with section 404 of the Sarbanes-Oxley Act 2002 (US) for the 2006 and 2007 financial years, a considerable amount of resource and effort continued to be committed during 2008 and compliance in relation to the 2008 financial year was also successfully completed. This is reported on in more detail in the annual report on Form 20-F that is filed with the SEC. The processes and procedures have been successfully integrated into day-to-day business operations and proven to provide a sustainable solution for ongoing compliance. The board has reviewed the system of internal control, including internal controls over financial reporting, which has been in place for the year under review and up to the date of approval of the annual report. Such systems are designed to manage rather than eliminate the risks inherent in a fast-moving, high-technology business and can, therefore, provide only reasonable and not absolute assurance against material misstatement or loss.
The Group has a number of other committees which contribute to the overall control environment. These include:
The risk review committee consists of the Chief Technology Officer, the Chief Financial Officer, the Group Financial Controller and the Company Secretary and it receives and reviews quarterly reports from the divisions and corporate functions. The committee is responsible for identifying and evaluating risks which may impact the Group’s strategic and business objectives and for monitoring the progress of actions designed to mitigate such risks. The risk review committee reports formally to the executive committee twice a year where its findings are considered and challenged and, in turn, the executive committee reports to the board once a year.
The compliance committee consists of the General Counsel, the Chief Operating Officer, the Chief Financial Officer, the EVP Human Resources, the VP Corporate Operations, the Chief Information Officer and the Company Secretary. It oversees compliance throughout the business with all appropriate international regulations, trading requirements and standards, including direct oversight of financial, employment, environmental and security processes and policies. The compliance committee has a reporting line to the audit committee.
The disclosure committee comprises the Chief Executive Officer, the Chief Financial Officer, the Group Financial Controller, the General Counsel, the Director of Investor Relations and the Company Secretary. It is responsible for ensuring that disclosures made by the Group to its shareholders and the investment community are accurate, complete and fairly present the Group’s financial condition in all material respects.
In addition, there is a series of interconnected meetings that span the Group from the weekly management meeting chaired by the Chief Executive Officer, and the weekly business review meeting chaired by the Chief Operating Officer, the purpose of which is to monitor and control all main business activities, sales forecasts and other matters requiring approval that have arisen within the week, to the board meetings of the Group. Each month management reviews with representation from relevant divisions and functions across the Group; revenues, orders booked, costs, product and project delivery dates and levels of defects found in products in development. The outputs of the weekly business review meeting and the monthly operations meeting are reviewed by the executive committee which, in turn, raises relevant issues with the board of the Group. The processes for identifying, evaluating and managing the significant business, operational, financial, compliance and other risks facing the Group have been in place for the year under review and up to the date of approval of the annual report and financial statements.
As required by the Combined Code, the audit committee has considered whether it would be appropriate for the Group to have its own internal audit function and has concluded that, taking account of its relatively small number of employees and a high degree of centralisation in the way the business is run, this is not appropriate at present. The committee has confirmed this view to the board. The Group has a published management system comprising documented processes and responsibilities across all business functions and operations. As an autonomous part of this system, an operational audit function carries out a programme of audits to assess its effectiveness and efficiency, resulting in continuous maintenance and improvement of the system, adapting to changes in business operations as necessary. To demonstrate compliance with the Sarbanes-Oxley Act, the audit function also maintains the documented controls over financial reporting and confirms the operation of them either by direct testing or through a monitored self-assessment programme. The management system is audited externally by Lloyd’s Register Quality Assurance for compliance with ISO9001:2000 and to support the Sarbanes-Oxley compliance activity.
Any significant control failings identified through the operational audit function or the independent auditors are brought to the attention of the compliance committee and undergo a detailed process of evaluation of both the failing and the steps taken to remedy it. There is then a process for communication of any significant control failures to the audit committee.
While the Group is accountable to its shareholders, it also endeavours to take into account the interests of all its stakeholders, including employees, customers and suppliers and the local communities and environments in which it operates. The Chief Financial Officer takes responsibility for these matters, which are considered at board level. A corporate responsibility (CR) report is on pages 26 and 27 of this report and a more detailed version is available via the Group’s website www.arm.com. The company’s Code of Business Conduct and Ethics is also available on the Group’s website and the Group regularly monitors employees’ awareness of Group policies and procedures, including ethical policies. The Group also operates a whistleblowing policy which provides for employees to have access to senior management to raise concerns in strict confidence about any unethical business practices. There is also a facility to make reports by telephone to an independent third party through a whistleblowing hotline.
As a company whose primary business is the licensing of IP, employees are highly valued and their rights and dignity are respected. The Group strives for equal opportunities for all its employees and does not tolerate any harassment of, or discrimination against, its staff. The Group endeavours to be honest and fair in its relationships with its customers and suppliers and to be a good corporate citizen respecting the laws of the countries in which it operates.
The Group’s premises are composed entirely of offices since it has no manufacturing activities. Staff make use of computer-aided design tools to generate IP. This involves neither hazardous substances nor complex waste emissions. With the exception of development systems products, the majority of “products” sold by the Group comprise microprocessor core and physical IP designs that are delivered electronically to customers.
A number of initiatives in this area have continued in 2008. The Group’s environmental policy is published on its website within the CR report. An environmental action plan is implemented through various initiatives. These include monitoring energy usage, resource consumption and waste creation so that targets set for improvement are realistic and meaningful, ensuring existing controls continue to operate satisfactorily and working with suppliers to improve environmental management.
In line with the Companies Act 2006, the articles of association enable the Company to send information to shareholders electronically and make documents available through the website rather than in hard copy, which provide both environmental and cost benefits. Shareholders can opt to continue receiving a printed copy of the annual report if they prefer.
Although ARM operates in an industry and in environments which are considered low risk from a health and safety perspective, the safety of employees, contractors and visitors is a priority in all ARM workplaces world-wide. Continual improvement in safety management systems is achieved through detailed risk assessments to identify and eliminate potential hazards and through occupational health assessments for employees. More detail about the Group’s approach to environmental matters and health and safety is included in the CR report on pages 26 and 27.
By order of the board
Patricia Alsop, Company Secretary