Management Consulting Group PLC - Corporate Governance

Corporate governance

The maintenance of effective corporate governance is a key priority for the Board. Accordingly, the Board has considered carefully the requirements of Section 1 of the 2006 Combined Code on Corporate Governance ("the Code") and has taken various actions in light of its guidance. Throughout the year ended 31 December 2007, the Company complied with the Code. Due to the sudden resignations on 19 February 2008, the Company breached the Code, as described below.

Board of directors

From 1 January 2007 to 25 April 2007 the Board comprised the non-executive Chairman, one executive director and six non-executive directors. On 26 April 2007 Mr Smith was appointed an executive director and from that date there were two executive directors. Mr Manardo stood down as a non-executive director on 30 May 2007 and from that date until 19 February 2008, there were five non-executive directors.

From 19 February 2008, there was one executive director, one executive chairman and four non-executive directors. On 19 March 2008, three new executive directors were appointed.

Under the terms of the Code, the Chairman is not regarded as independent by virtue of his position. Mr Bolduc is not considered to be independent by reason of the commission arrangements described in the Directors' Remuneration Report, contained within the 2007 Annual Report and Accounts. For the period of his directorship Mr Manardo was not regarded as independent by virtue of his position in an agreement dated 1 September 2006 which determined the strategy of the Group. Baroness Cohen, Mr Barber, Mr Ferriss and Mr Simon are considered to be independent non-executive directors.

The roles of the Board and the management are clearly defined. During 2007, the roles of Chairman, Chief Executive and Senior Independent Director were separated and clearly defined in writing. The terms and conditions of appointment of the non-executive directors are available for inspection at the Company's registered office and are also available at Annual General Meetings.

On 19 February 2008, the roles of Chairman and Chief Executive were combined when Dr Stomberg and Mr Parry stood down from the Board and Mr Barber was appointed Executive Chairman. This combining of the roles of Chairman and Chief Executive constitutes a breach of the Code.

The Board is satisfied that the Chairman and each of the non-executive directors committed sufficient time during 2007 for the fulfilment of their duties as directors of the Company. None of the non-executive directors has any conflict of interest which has not been disclosed to the Board.

The number of Board and Committee meetings eligible for attendance and attended by each of the directors during the year ended 31 December 2007 was as follows:

Name	Board meetings	Audit Committee meetings	Remuneration Committee meetings	Nominations Committee meetings
A J Barber	9	5	4	2
J P Bolduc	8	-	-	-
Baroness Cohen	8	4	4	1
S A Ferriss	9	5	-	-
J A Manardo	2	-	-	-
K A H Parry	9	-	-	2
A H Simon	8	-	4	2
C H Smith	8	-	-	-
R W H Stomberg	9	-	3	2
Total meetings held	9	5	4	2

On appointment, directors are provided with formal details of their responsibilities under legislation applicable to a company listed in the UK. Changes to such legislation and other relevant factors affecting the Group are communicated to all directors. Newly appointed directors are also required to participate in an induction programme in order to familiarise themselves with the Group's businesses. Regular presentations are made to the Board by senior management in order to refresh and expand this knowledge.

All directors are authorised to obtain, at the Company's expense and subject to the Chairman's approval, independent legal or other professional advice where they consider it necessary. All directors have access to the Company Secretary who oversees their ongoing training and development needs.

Election and re-election of directors

The Company's Articles of Association contain detailed rules for the appointment and retirement of directors. There is a formal procedure in place to select and appoint new directors to the Board. These directors are required to retire at the next Annual General Meeting, but can offer themselves for re-election by shareholders. All directors are required to submit themselves for re-election at intervals not exceeding three years.

The Board annually evaluates the performance of individual directors, the Board as a whole and its Committees. This review comprises structured interviews with each director followed by the presentation of the results of this process to the Board and individual discussions with the Chairman or Chief Executive. The results of the evaluation were approved by the Chairman and are specifically taken into account when considering the re-appointment of directors.

Operation of the Board

The Board meets regularly. Nine meetings were held during 2007. All members of the Board are supplied, in advance of meetings, with appropriate information covering matters which are to be considered. The Chairman of the Board meets with non-executive directors throughout the course of each year in the absence of executive directors.

There is a formal schedule of decisions reserved for the Board. This includes approval of the following: the Group's strategy, the annual operating plan and budget, the annual and interim financial statements, significant transactions, major capital expenditures, risk management policies, the authority levels vested in management and Board appointments and remuneration policies. As described below, the review of certain matters is delegated to Board committees, which make recommendations to the Board in relation to those matters reserved for the Board as a whole.

Audit and Risk Committee

The membership of the Committee during 2007 and at present, except as noted is as follows:

Mr Alan Barber - Chairman, member from 2005, resigned 19 February 2008
Baroness Cohen - member since 2003
Mr Stephen Ferriss - member since 2006, appointed Chairman 19 February 2008
Mr Andrew Simon - appointed 19 February 2008

The Chairman of the Committee during 2007, Mr Barber, is a Chartered Accountant and during his Chairmanship was considered to have recent and relevant financial experience. Mr Ferriss is considered to have recent and relevant financial experience.

The Committee met five times during 2007. The external auditors attended all the meetings and the Committee met privately with them on five occasions.

Operation of the Audit and Risk Committee

The Committee's terms of reference were reviewed and updated with effect from 2 March 2007 to conform with current best practice and are available through the link below. They are also available in hard copy format from the Company Secretary.

The main activities of the Committee are as follows:

the review and approval of the interim and full year financial statements;
the review of the internal financial control and risk management systems;
the review of the work done by, the fees paid to and independence of the external auditors; and
the review and approval of work performed by the Group's internal audit function.

The Code recommends that the Committee should comprise at least two members and that all members should be independent non-executive directors. Throughout 2007 and up to the present date, the Committee has comprised three independent non-executive directors.

Further details of the main activities of the Committee during a particular year are available in the Committee's report within the Annual Report and Accounts.

Audit and Risk Committee Terms of Reference (PDF)

Nominations Committee

The membership of the Committee during 2007 and at present, except as noted is as follows:

Dr Rolf Stomberg - Chairman, member from 1998, resigned 19 February 2008
Mr Alan Barber - member since 2005
Baroness Cohen - member since 2003
Mr Kevin Parry - member from 2000, resigned 19 February 2008
Mr Andrew Simon - member since 2006

The Committee's purpose is to consider future appointments to the Board and the succession policy for key management positions. The Nominations Committee adopted formal terms of reference dated 14 March 2003. These were updated on 2 March 2007 and are available through the link below. They are also available in hard copy format from the Company Secretary.

The Code recommends that a majority of the members of the Nominations Committee should be independent non-executive directors. The majority of the Committee has been independent throughout 2007 and up to the present date.

Nominations Committee Terms of Reference (PDF)

Remuneration Committee

The membership of the Committee during 2007 and at present, except as noted is as follows:

Mr Andrew Simon - Chairman, member since 2006
Baroness Cohen - member since 2003
Mr Alan Barber - member since 2005
Dr Rolf Stomberg - member from 2006, resigned 19 February 2008
Mr Stephen Ferriss - appointed 19 February 2008

The Committee reviews and determines, on behalf of the Board, the salary, benefits and pension packages of the executive directors. The Committee also reviews, on behalf of the Board, the remuneration packages of the highest paid executives and the Company Secretary. Fees for the Chairman and other non-executive directors are determined annually by the Board based on market information obtained from external surveys.

Remuneration policy

Compensation packages for executive directors are set by reference to individual and corporate performance, individual competencies, external market comparisons in commerce generally and consultancy specifically and remuneration levels below Board level in the Group.

Further details of the Remuneration Committee

Further details of the role and operation of the Remuneration Committee are provided in the Directors' Remuneration Report which is contained in the Annual Report and Accounts.

The Code recommends that the Committee should comprise at least two independent non-executive directors. The 2006 Combined Code allows a Chairman to be a member of a Remuneration Committee if he was considered independent on his appointment as Chairman of the Company. Both Dr Stomberg and Mr Barber were considered independent on their appointment as Chairman and Executive Chairman respectively. The 2006 Combined Code applies to the financial year ending 31 December 2007 and beyond.

Remuneration Committee Terms of Reference (PDF)

Financial matters

The Group has adopted a code of ethical conduct applicable to the Board and all members of the finance function. In addition, it has a "whistleblowing" policy whereby procedures exist that allow employees to report any financial wrongdoing that they believe may have occurred.

The Board has also defined which services can be purchased from the Group's auditors and has adopted procedures in respect of the purchase of these services to minimise the risk of an actual or perceived conflict of interest. For similar reasons, the Board has adopted a policy in respect of hiring staff from the auditors who have been involved in the Group's audit.

Relations with investors and the AGM

The Annual General Meeting gives all shareholders the opportunity to communicate directly with the Board. During the year, the directors are available to respond to enquiries from investors on the Group's operations. Effective communication with fund managers, institutional investors and analysts is actively pursued and this encompasses issues such as performance, policy and strategy.

The executive directors hold discussions with major shareholders. The Chairman is available to shareholders if there are matters that they wish to discuss with him directly. Announcements are made to the London Stock Exchange and the business media concerning trading and business developments to provide wider dissemination of information. Registered shareholders are sent copies of both the annual report and accounts, and the interim report. This investor relations website contains other information relevant to investors.

Internal controls

The Company, as required by the Listing Rules, has complied with the Code provisions on internal control having established the procedures necessary to implement the guidance issued in September 1999 (The Turnbull Committee Report) and by reporting in accordance with that guidance.

The Board has overall responsibility for the Company's system of internal control and reviewing its effectiveness whilst the role of management is to implement Board policies on risk and control. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives. In pursuing these objectives, internal controls can only provide reasonable and not absolute assurance against material misstatement or loss.

There is a continuous process for identifying, evaluating and managing the significant risks faced by the Company which is in accordance with the guidance set out in The Turnbull Committee Report and has been in place during 2007 and up to the date of approval of the annual report and accounts. This process, which is regularly reviewed by the Board, is as follows:

The Group's management operates a risk management process which identifies the key risks facing the business and reports to the Board on how those risks are being managed. This is based on a risk register produced by executive management which identifies those key risks, the probability of those risks occurring, their impact if they do occur and the actions being taken to manage those risks to the desired level. This risk register is discussed at Board meetings on a regular basis and regular monitoring reports are presented to the Board. The management of these risks is monitored by the internal audit function.
Large acquisitions and capital projects require Board approval.
There is regular communication between management and the Board on matters relating to risk and control.
The Board has established a strong control framework within which the Group operates. This contains the following key elements:

Organisational structure with clearly defined lines of responsibility, delegation of authority and reporting requirements.
Defined expenditure authorisation levels.
On site, video and teleconferencing reviews of operations, covering all aspects of each business are conducted by Group executive management on a regular basis throughout the year.
The financial reporting and information systems which comprise: a comprehensive annual budget which is approved by the Board; weekly reports of key operating information; cash flow and capital expenditure reporting; monthly results and forward performance indicators which are measured against the annual budget and the prior year's results. Significant variances are reviewed by the Board and executive management and action is taken as appropriate. The forecast for the year is revised when necessary.
Group tax and treasury are coordinated centrally. There is weekly cash and treasury reporting to Group management and periodic reporting to the Board on the Group's tax and treasury positions.
Internal audits are performed by Group's internal audit function.

Statement regarding remuneration consultants

This document is the statement required by Provision B.2.1. of the July 2003 edition of the Combined Code.

The Remuneration Committee of the Board of directors of Management Consulting Group PLC (the "Committee") has appointed New Bridge Street Consultants LLP ("NBSC") as its remuneration consultants.
NBSC has no other connection with the Company other than in the provision of advice on executive and employee remuneration.
NBSC advises the Committee directly on matters within the Committee's terms of reference on which the Committee chooses to consult NBSC.
NBSC may also advise the Company generally on aspects of executive and employee remuneration, typically on the implementation and ongoing operation of executive remuneration schemes. Such advice is usually provided through the Finance Director.
NBSC may also advise the Board of directors of Management Consulting Group PLC (or those directors charged by the Board to make recommendations) from time to time on the remuneration of non-executive directors, including the Chairman.