Annual Report and Accounts 2010

Corporate governance

This section and the remuneration report detail how the Group has applied the principles of good governance contained in the Combined Code on Corporate Governance 2008.

Compliance with the Combined Code on Corporate Governance Code 2008 (UK) and the Sarbanes-Oxley Act 2002 (US)

The Group has complied with the provisions of the Combined Code on Corporate Governance 2008, with the following exceptions:

B.1.1 John Scarisbrick completed nine years’ service as an independent non-executive director in August 2010. The board continues to regard him as independent through his conduct and the challenging contributions he makes both at and between board meetings. He stepped down from the Remuneration Committee on 16 December 2010 and is no longer included in the number of independent non-executive directors for the purposes of assessing board balance. He will retire from the board at the 2011 AGM.

B.1.2 Between the retirement of Lucio Lanza at the AGM on 14 May 2010 and 25 January 2011 there were five non-executive directors (all of whom were regarded as independent until August 2010 when John Scarisbrick reached his ninth anniversary) and six executive directors. The Group achieved full compliance with the requirements of s404 of the Sarbanes-Oxley Act 2002 for the fifth successive year.

Composition and operation of the board

The Combined Code on Corporate Governance 2008 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, one non- executive director 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 have completed conflicts of interest questionnaires and any planned changes in their directorships outside the Group are subject to prior approval by the board. No conflicts of interest arose in 2010 or to date in 2011 and no situations were or have since been identified that might lead to a conflict of interests.

The board reviews the independence of the non-executive directors on appointment and at appropriate intervals and considers the six independent 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. Kathleen O’Donovan became the Senior Independent Director upon the retirement of Jeremy Scudamore on 31 January 2011. The Senior Independent Director provides a communication channel between the Chairman and non-executive directors and is available to discuss matters with shareholders, if required. Janice Roberts and Larry Hirst (who joined the board on 25 January 2011), Andy Green (who joined the board on 25 February 2011), 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 in the remuneration report. In the opinion of the board, these shareholdings do not detract from the non-executive directors’ independent status.

The Chairman is a non-executive director of four other companies (ST Microelectronics N.V., Soitec S.A., TomTom N.V. and B E Semiconductor Industries N.V.) and he does not chair any other board.

Non-executive directors have the opportunity to influence agendas for board discussions and in 2010 were active in setting the agenda for the strategic review and ensuring the amount of time spent reviewing strategic and operational issues was appropriately balanced. The board holds at least one meeting each year in one of the Group’s overseas offices and spent three days visiting the Processor Division Design Centre in Austin, Texas in 2010. 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 2010, the Chairman held at least three 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 legal or other professional advice at the Group’s expense. In addition, all members of the board have access to the advice of the Company Secretary. The Company Secretary also acts as secretary to the board committees.

Board meeting attendance
The table below shows directors’ attendance at scheduled board meetings and conference calls or ad hoc meetings which they were eligible to attend during the 2010 financial year:

 

Scheduled board
meetings

Conference calls/
ad hoc meetings

Number

6

5

Doug Dunn

6/6

4/5

Warren East

6/6

5/5

Tudor Brown

6/6

2/5

Mike Inglis

6/6

5/5

Lucio Lanza (retired 14 May 2010)

2/3

2/2

Mike Muller

6/6

4/5

Kathleen O’Donovan

6/6

2/5

Philip Rowley

6/6

5/5

John Scarisbrick

6/6

4/5

Tim Score

6/6

4/5

Jeremy Scudamore

6/6

5/5

Simon Segars

6/6

4/5

Young Sohn

6/6

4/5

management structureManagement structure
The Group has a traditional UK board structure with a unitary Group board comprising the Chairman, executive and non-executive directors. The audit and remuneration committees are made up of independent non-executive directors and they, together with the nomination committee, report to the board. The divisions and functions report to the executive committee. The risk review committee reports periodically to the executive committee, audit committee and the board. The head of the Corporate Operations Group also has a separate reporting arrangement to the Chairman of the audit committee.

Main responsibilities of the Chairman include:

  • leadership of the board and creating the conditions for overall board and individual director effectiveness and a constructive relationship with good communications between the executive and non-executive directors;
  • ensuring that the board as a whole plays a full and constructive part in the development of strategy and overall commercial objectives;
  • chairing the nomination committee which initiates succession planning to retain and build an effective and complementary board;
  • ensuring that there is effective communication with shareholders and that members of the board develop an understanding of the views of the major investors in the Company;
  • promoting the highest standards of integrity, probity and corporate governance throughout the Company, particularly at board level; and
  • ensuring that the performance of the board as a whole, its committees, and individual directors is formally and rigorously evaluated at least once a year.

Main responsibilities of the Chief Executive Officer include:

  • proposing and developing the Company’s strategy and overall commercial objectives in conjunction with the executive committee;
  • day-to-day management of the Group;
  • managing the executive committee;
  • leading the communication programme with shareholders and analysts; and
  • fostering good relationships with key stakeholders.

Communicating with our shareholders
ARM is committed to regular, clear and consistent communication with our investors and our website contains all the essential information for shareholders, analysts and institutional investors.

arm site info

Information and communication with shareholders and other stakeholders

Before each meeting, the board is provided 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 on the following pages.

The board makes considerable efforts to establish and maintain good relationships with shareholders. There is regular dialogue with institutional investors during the year other than during close periods. The main channel of communication continues to be through the Chief Executive Officer, the Chief Financial Officer and the VP of Investor Relations, although the Chairman, the Senior Independent Director and the other directors are available to engage in dialogue with major shareholders as appropriate. 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.

We continued to develop our engagement with other stakeholders in 2010, strengthening our relationships and expanding the ARM network of Partners and our Connected Community.

ARM’s University Programme is an important initiative for the future of the business and our relationships with business partners. We engage with universities around the world, developing the next generation of ARM engineers, donating equipment and software, helping to design courses and textbooks, and providing technical support and training to students and faculties. In 2010 the programme strengthened its commitment to institutions in India, South America and China to nurture growing talent. ARM and our Partners are seeing the benefit of the University Programme as students graduate with experience in designing with ARM products and as university engineering departments base their own research around ARM technology.

At present, around 28 sell-side 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 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 in turn 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 AGM, scheduled for 12 May 2011, 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.

All resolutions proposed at the 2011 AGM will be decided on a poll and the voting results will be published via RNS and the SEC and will be available on the Group’s website.

Board evaluation, induction and training

The board undertakes an annual board evaluation. During 2010, this exercise was conducted with the assistance of external advisers, Independent Audit, who observed a board meeting, reviewed board papers and had in-depth individual discussions with all directors, other key executives and the external audit partner. They presented their findings to the board in December 2010. Their detailed report and recommendations were discussed in detail in January 2

The evaluation covered:

  • the work of the board;
  • board committees;
  • succession planning; and
  • process and practicalities.

The overall conclusion was that individual board members are satisfied that the board works well and operates effectively in an environment where there is constructive challenge from the non-executive directors. They are also satisfied with the contribution made by their colleagues and that board committees operate properly and efficiently.

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. They also receive guidance on the regulatory regimes and corporate governance framework that the Group operates under. 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. During 2010, the board received an update from the Company Secretary on UK and US Corporate Governance matters.

The terms of reference of the audit, remuneration and nomination committees are published on the Group’s website at www.arm.com.

Executive committee

The executive committee is responsible for developing and implementing the strategy approved by the board. In particular, the 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 Divisions and Media Processing Business Unit, the EVPs of Human Resources, Corporate Development, Sales and Marketing, the General Counsel 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 at www.arm.com.

Audit committee

Kathleen O Donovan

In the very challenging economic climate during 2010, the committee’s focus has been on financial performance and oversight of the way the Group addresses risk. In 2011 the board anticipates spending more time reviewing its appetite for and approach to risk.”

Kathleen O’Donovan, Committee Chairman from January 2011

Name of director

Position

Meetings
attended

Philip Rowley

Independent non-executive director

4/4

Kathleen O’Donovan

Independent non-executive director

4/4

Jeremy Scudamore

Senior Independent Director

4/4

Young Sohn

Independent non-executive director

4/4

During 2010 Philip Rowley was the financial expert as defined in the Sarbanes-Oxley Act 2002 (US). Kathleen O’Donovan is also qualified to fulfil this role and became the financial expert on 26 January 2011 when she assumed the chairmanship of the committee. Both have recent and relevant financial expertise. The external auditors, Chief Executive Officer, Chief Financial Officer, the VP Corporate Operations, the Head of Tax 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.

As part of the process to refresh the board and its committees, Janice Roberts and Larry Hirst joined and Young Sohn and Jeremy Scudamore stepped down from the audit committee on 26 January 2011.

During the year, the activities of the committee included:

  • a review of the risk assessment and mitigation processes and development of an enhanced Corporate Risk Register giving the board greater visibility of risk assessment and mitigation within the Group;
  • reviewing the 2010 internal and external audit plans and reports on overseas subsidiaries;
  • considering and approving the assumptions in the annual impairment review, prior to approval by the full board;
  • reviewing the status of Sarbanes-Oxley compliance and testing;
  • re-approval of the pre-approved non-audit services policy; and
  • reviewing the external auditors’ performance, effectiveness, independence and fees, the results of which have enabled us to recommend the reappointment of PricewaterhouseCoopers LLP.

The committee’s other responsibilities include:

  • monitoring the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance and reviewing any significant financial reporting judgements contained therein;
  • reviewing the effectiveness of the Group’s internal controls over financial reporting;
  • 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;
  • assessing 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 assessing their nature, extent and cost effectiveness; and
  • considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Services Authority and the requirements of the SEC.

PricewaterhouseCoopers LLP have been the Group’s auditors since it listed on the London Stock Exchange in April 1998. The external auditors are required to rotate the audit partner responsible for the Group and subsidiary audits every fifth year end and the current lead audit partner has been in place since July 2007. The audit committee considers that the relationship with the auditors is working well and remains satisfied with their effectiveness. This view was supported by a review of the effectiveness of the external audit process which was undertaken early in 2011 involving the audit committee, the executive team and senior managers who interact with the auditors. It looked at robustness of audit, quality of delivery and quality of people and service and concluded that the services provided by the auditors and their mode of delivery are effective. Accordingly, the audit committee has not considered it necessary to date to require the firm to tender for the audit work.

There are no contractual obligations restricting the Group’s choice of external auditor. The committee also keeps under review the value for money of the audit. 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 Public Company Accounting Oversight Board Rule 3526, “Communication with Audit Committees concerning independence”. Through this process, the committee has concluded that the auditors are independent.

Policy on auditors providing non-audit services

To avoid the possibility of the auditors’ objectivity and independence being compromised, there is an agreed policy in place on the provision of non-audit services by the auditors, which sets out arrangements for approving:

  • services that have general pre-approval by the audit committee;
  • services that require specific pre-approval by the audit committee before work commences; and
  • services that cannot be provided by the auditors.

The Group’s tax advisory work is carried out by the auditors only in cases where they are best suited to perform the work in a cost effective manner, given their familiarity with the Group’s business. In other cases, the Group has engaged another independent firm of accountants to perform tax advisory 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 benchmarking of the internal audit function, human resources, and royalty audits. A breakdown of fees paid to the auditors can be found in note 5 to the financial statements.

Nomination committee

Doug Dun

We spent a considerable amount of time and effort in 2010 defining the skills and attributes required for the new non-executive director appointments and in interviewing prospective candidates.”

Doug Dunn, Committee Chairman

Name of director

Position

Meetings
attended

Doug Dunn

Chairman

4/4

Lucio Lanza (resigned 14 May 2010)

Independent non-executive director

0/1

Kathleen O’Donovan (appointed 14 May 2010)

Independent non-executive director

3/3

Philip Rowley

Independent non-executive director

4/4

John Scarisbrick

Non-executive director

4/4

Young Sohn (appointed 16 December 2010)

Independent non-executive director

N/A

During the year, the activities of the committee included:

  • successfully achieving our objective of identifying three suitable new independent non-executive directors and recommending their appointment to the board;
  • engaging an external search firm, Russell Reynolds, to seek and introduce suitable candidates and we were very pleased to welcome Janice Roberts and Larry Hirst to the board in January 2011 and Andy Green in February 2011; and
  • as part of the process to refresh the board and its committees, Kathleen O’Donovan and Young Sohn joined the nomination committee on 14 May 2010 and 16 December 2010 respectively.

The committee’s other responsibilities include:

  • leading the process for board appointments and making recommendations to the board in relation to new appointments of executive and non-executive directors;
  • reviewing succession planning, board composition and balance; and
  • considering the roles and capabilities required for each new appointment, based on an evaluation of the skills and experience of the existing directors.

Remuneration committee

A description of the composition, responsibilities and operation of the remuneration committee is set out in the remuneration report.

Internal control/risk management

The Group fully complies with the Combined Code on Corporate Governance 2008’s provisions on internal control, having established procedures to implement the Turnbull Guidance 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, while implementation of internal control systems is the responsibility of management. The Group has implemented an internal control system designed to help ensure:

  • the effective and efficient operation of the Group and its divisions by enabling management to respond appropriately to significant risks to achieving the Group’s business objectives;
  • the safeguarding of assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed;
  • the quality of internal and external reporting;
  • compliance with applicable laws and regulations and with internal policies on the conduct of the Group’s business; and
  • the ability to recover in a timely manner from the effects of disasters or major accidents which originate outside the Group’s direct control.

Compliance with section 404 of the Sarbanes-Oxley Act 2002 (US) has been successfully achieved for each financial year since it became effective for foreign private issuers in 2006. 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 for identifying, evaluating and managing the significant business, operational, financial, compliance and other risks facing the Group have been successfully integrated into day-to-day business operations through the ARM Management System and are proven to provide a sustainable solution for ongoing compliance. The board has reviewed and approved the system of internal control, including internal controls over the consolidation process and financial reporting, which have been in place for the year under review and up to the date of approval of the annual report and financial statements. These controls consist of extensive reviews by qualified and experienced individuals underpinned by a system of checklists that ensures that all elements of the financial statements and appropriate disclosures are considered and accurately stated. Control 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 and bodies which contribute to the overall control environment.

These include:

Risk review committee
The risk review committee consists of the Chief Technology Officer, the Chief Financial Officer, the VP Finance, ARM Group 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 reports to the board at least once a year.

The board will be formally reviewing and documenting its risk appetite during 2011.

Compliance committee
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.

Disclosure committee
The disclosure committee comprises the Chief Executive Officer, the Chief Financial Officer, the VP Finance, ARM Group, the General Counsel, the VP 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.

Operational meetings
In addition, there is a series of interconnected meetings that span the Group including the weekly executive team 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. Each month there are Operations and Customer Satisfaction Meetings where management reviews with representation from the divisions and functions: revenues, orders booked, costs, product and project delivery dates and levels of defects found in products in development. The outputs of these meetings are reviewed by the executive committee which, in turn, raises relevant issues with the board of the Group.

Internal audit function

The Group has an internal audit function that meets criteria set out in the key practice standards prescribed by the Institute of Internal Auditors. A number of steps were implemented during 2010 which enhanced the internal audit function through rebalancing the emphasis between operational and financial audit. These included a more formal and rigorous risk assessment process, a broadening of the scope of the internal audit programme and an increase in the financial capability within the Corporate Operations Group.

The Group’s management system documents processes and responsibilities across all business functions and operations. As an autonomous part of this system, the internal 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 ISO9001:2008 and as part of its Business Assurance scheme supports the Sarbanes-Oxley compliance activity.

Any significant control failings identified through the internal 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. There were no significant control failures during 2010 or up to 25 February 2011, being the latest practicable date before the printing of this report.

Whistleblowing procedures

The Group operates a whistleblowing policy which provides for employees to report concerns about any unethical business practices to senior management in strict confidence or, if they prefer, anonymously through an independent third-party telephone line. They can do so without fear of recrimination. The audit committee receives any such confidential reports from the compliance committee. There were no whistleblowing reports in 2010 and none up to 25 February 2011, being the latest practicable date before the printing of this report.

Environmental, social, corporate governance and ethical policies

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 included in this report and a more detailed version is available via the Group’s website www.arm.com. The Group regularly monitors employees’ awareness of Group policies and procedures, including its ethical policies. Employees reconfirm their understanding of key policies each year to reinforce awareness. The Group’s Code of Business Conduct and Ethics, which is available on the Group’s website, and the Company Rules have been updated in response to the Bribery Act 2010 and will be updated further when the Government guidance is issued. Further training will be given to all employees and arrangements with contractors and suppliers have been and will continue to be reviewed and updated as appropriate to reflect the requirements of the Act.

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 environmental initiatives have continued in 2010. The Group’s environmental policy is published on its website within the CR report. An environmental action plan is in place, including 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 Group 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.

Health and safety

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. By order of the board

Patricia Alsop sign

Patricia Alsop
Company Secretary