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Corporate Governance

Corporate Governance Report

The Society is not required to fully comply with the Corporate Governance Code 2014, however we have regard to it when establishing and reviewing our own corporate and governance arrangements. The Society’s Directors are committed to best practice in corporate governance and as noted in the Directors’ Report, this year the Society commissioned an external Board Effectiveness Review. The review noted that all elements of the Corporate Governance Code are being met, considering the Society’s size and complexity. This report highlights the best practice suggested by the Code by inclusion of the relevant paragraph and then explains the Society’s approach. The Society is aware that the Code was revised in July 2018 and applies to accounting periods commencing on or after 1 January 2019. The Society will give regard to the revisions when they are due to be applied.

The Role of the Board

A.1. Every company should be headed by an effective Board, which is collectively responsible for the long-term success of the Company.

The Board of Directors’ focus is to ensure the long term sustainability for the good of our members. The Board formulates the strategy, reviews business performance, oversees the identification and management of risks, adherence to laws and regulations and ensures that the required controls are in place and aligned to our strategy. The results achieved by the Society over recent years are a testament to the Board’s effectiveness.

In 2018 the Board of Directors has met at least 11 times with two additional days dedicated to strategy. Board meetings have a formal schedule with papers circulated in a timely manner to ensure Board members can perform their duties effectively. Minutes record details of Board, Board Committees and management meetings. The Society has a process to evaluate at least annually the performance and effectiveness of individual Non-Executive Directors, the Chairman, the Board and Board Committees. The performance of the Chief Executive is assessed by the Chairman and the Deputy Chairman and discussed at the Chairman’s and Nominations Committee. This appraisal process includes a 360-degree questionnaire and feedback from all the Non-Executive Directors. The Chairman is evaluated by the Deputy Chairman with assistance from the Senior Independent Director. The Chairman also evaluates the performance of all the Non-Executive Directors on an annual basis. This year 360-degree appraisals have been used to evaluate the performance of all Non-Executive Directors.

The Chief Executive evaluates the Finance Director and Operations Director as members of the Executive Team. This year the Board and Board committees were reviewed by an external company, BP&E Global. Annually the various committees review and agree their Terms of Reference. The Terms of Reference are endorsed by the Board.

In 2018 the Society has embedded its Enterprise Risk Management Framework (ERMF). There are four committees that report directly into the Board: Board Risk and Compliance Committee and the Audit Committee which meet at least quarterly; the Remuneration Committee and Chairman’s and Nominations Committee both of which meet at least twice a year. In addition, the Society has an Executive Risk Committee that is part of the Society’s second line of defence and reports into the Board Risk and Compliance Committee. There are three first line management committees; Assets and Liabilities Committee, Retail Credit Risk Committee and Operational and Conduct Risk Committee, all of which meet monthly.

The Terms of Reference for Committees can be found here.

Audit Committee

The purpose of the Committee is to oversee all audit related matters, in particular, to review the Society’s financial reporting arrangements, the effectiveness of its internal controls and its risk management framework, the internal and external audit processes and the Society’s whistleblowing procedures which enables employees to raise concerns confidentially. The Committee makes recommendations to the Board and reports on its activities. Minutes of the meetings are circulated to the Board of Directors, along with a verbal report from the Chairman of the Audit Committee highlighting key issues for Board review. The key responsibilities of the Committee are set out below, together with examples of how it discharges its duties.

At least annually the Committee meets with the External and Internal Auditors without the Executive Directors present. The Board is satisfied that the members of the Committee have specialist expertise including current and relevant financial, legal and risk management expertise.

The key responsibilities of the Audit Committee are as follows. These are reflected in the Committee’s Terms of Reference.

Financial reporting, including:

Monitoring the integrity of the Society’s financial statements and reviewing critical accounting policies, judgements and estimates.

Reviewing the appropriateness of the going concern basis for preparing the accounts.

Providing advice to the Board on whether the Annual Report, taken as a whole, are fair, balanced and understandable.

External Audit, including:

Reviewing the continued objectivity and independence of External Audit, including the level and appropriateness of non-audit services.

Considering the appointment, removal, performance and remuneration of the external audit firm.

Considering the planning, scope and findings of the annual external audit, the receipt of and responses to, the Auditor’s management letter and reviewing the degree of liaison with Internal Audit.Internal controls and risk management, including;

Reviewing the adequacy and effectiveness of the Society’s internal financial controls and internal control and risk management systems in conjunction with reviewing reports produced by Internal and External Audit.

Reviewing the statements to be included in the Annual Report concerning internal controls and risk management.

Whistleblowing, including:

Reviewing the adequacy and security of the Society’s whistleblowing arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters.

Ensuring that whistleblowing arrangements allow proportionate and independent investigation of such matters.

Internal Audit, including:

Considering and approving the strategic and annual plans of work.

Considering management responses to recommendations.

Considering the appointment, removal, performance and remuneration of the internal audit firm.

Financial reporting:

The Committee considered the following significant judgments and estimates, and considers reports and representations from external auditors and management. More detail on the principal judgements and accounting estimates is set out in Note 1 of these Accounts.

Effective Interest Rate (“EIR”): The application of the EIR method

of accounting requires judgement and the accounting entries involve estimates based on key assumptions, particularly around behavioural life of products and requires management to make a number of assumptions.

The Statement of Financial Position as at 30 November 2018 includes the recognition of a deferred EIR asset of £0.2m (2017: £0.3m).

The Committee spent time understanding and challenging the judgements made and the EIR methodology applied by management in determining the EIR. The Committee agreed that management’s judgements were appropriate in respect of the year ended 30 November 2018.

Allowance for impairment losses on loans and receivables: Determining the appropriateness of impairment losses involves judgement and requires management to make a number of assumptions around default rates, likely asset recoveries and other factors. The loan loss impairment provisions recorded by the Society as at 30 November 2018 were £0.6m (2017: £0.8m).

The Committee considered and challenged the provisioning methodology applied by management, including the results of statistical loan loss models to support the impairment provisions. The Committee was satisfied that the impairment provisions were appropriate.

Hedge accounting: The Society has implemented hedge accounting in line with FRS 102. The designated macro hedges require matching, hedge effectiveness documentation and testing, and fair valuing both the hedged instrument and the underlying hedged item.

The Committee considered the appropriateness of the hedging arrangements and the fair value processes in respect of hedging instruments and the underlying hedged items. The Committee agreed that hedge accounting had been applied in accordance with FRS 102.

Retirement benefit obligations: The Society makes significant judgements to calculating the present value of the retirement benefit obligations. The major assumptions are in respect of mortality, price inflation, discount rates, pension increases and earnings growth. The pension scheme liability recorded at 30 November 2018 was £431k (2017: £2,888k)

The Committee considered the assumptions used by reference to advice received from our Actuaries and independent challenge from our external auditors. The Committee is satisfied that the assumptions used are reasonable.

Accounting Policies:

The Committee examined the Society’s accounting policies to ensure they are appropriate and applied consistently. They also confirmed that the policies are in line with applicable Accounting Standards.

The Committee considered whether the 2018 Annual Report, when taken as a whole, is fair, balanced and understandable and whether it provides the necessary information for members to assess the Society’s performance, business model and strategy. The Committee is satisfied that the 2018 Annual Report meets this requirement, and, in particular, that appropriate disclosure has been included for both positive and negative developments in the year. In January 2019, the Committee recommended the approval of the final 2018 Annual Report to the Board.

Internal Audit:

Internal Audit is outsourced to Deloitte LLP. During 2017/18 the Committee monitored the effectiveness of Internal Audit and the Internal Audit programme, approving the audit plan and budget, and confirming that appropriate resources were in place to execute the plan effectively.

In the year ended 30 November 2018, Internal Audit carried out a significant number of audits of varying size and complexity. The findings from each individual review are presented to the Audit Committee including management responses. The Audit Committee considers the adequacy of management responses and the implications of significant findings on the effectiveness of the overall internal control system and the risk management framework.

Internal Control and Risk Management:

The Committee was satisfied that internal controls over year end financial reporting were appropriately designed and operating effectively.

External Audit

The Audit Committee is responsible for assessing the effectiveness of the annual audit process, for monitoring the independence and

objectivity of the External Auditor and for making recommendations to the Board in relation to the appointment of the External Auditor. Both the Board and the External Auditor have safeguards in place to protect the independence and objectivity of the External Auditor. The current External Auditor is KPMG LLP. Performance is reviewed annually.

The Society has a policy for the use of external auditors for non-audit work in line with new legislative requirements. The Society would not consider the appointment of the External Auditor for the provision of other services that might impair independence.

Chairman's and Nominations Committee

The Committee is responsible for making recommendations to the Board on matters relating to the composition of the Board, including Board and Executive succession planning, the appointment of new Directors, election and re-election of Directors and the Chief Executive’s annual appraisal.

Remuneration Committee

The Committee’s main role is to approve the remuneration and incentive schemes for the Society’s Executive and senior management. The Executive together with the Chairman meet annually to review Non-Executive Director fees, including those of the Deputy Chairman, Senior Independent Director, Chairman of the Audit Committee and Chairman of Board Risk and Compliance Committee. The Directors’ Remuneration Report can be found on page 22 of the Annual Report.

Board Risk and Compliance Committee

The role of the Committee is to act as a second line of defence to the Society’s risk management framework. In 2016 the Committee’s Terms of Reference were amended to transfer the responsibility for overseeing the Society’s Compliance function from Audit Committee to Board Risk and Compliance Committee. The Committee assists the Board in fulfilling its oversight responsibilities by receiving regular reports from the Management Committees which enables the Committee to assess the risks involved in the firm’s business (including those risks that would threaten its business model, future performance, solvency or liquidity) and to consider the principal risks identified by management and consider if they are appropriate.

It reviews the Society’s Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). The Committee is responsible for ensuring the Society complies with the Board’s Risk Tolerance and Culture Policy. It also reviews the Society’s future risk strategy for economic, capital, liquidity, reputational and operational risk profiles. The Committee uses a variety of internal and external sources to make these assessments.

Management Committees

Assets and Liabilities Committee

This Committee manages wholesale credit risk (the risk of default on assets), liquidity risk (the risk that the Society will not be able to meet its financial obligations) and interest rate risk (arising from a mismatch between interest rate characteristics). This Committee is responsible for ensuring the Society operates within agreed parameters set out in the Board’s Liquidity and Financial Risk Management Policies. It is involved in the development of the Society’s ICAAP and ILAAP.

Conduct Risk Committee

The Committee manages Conduct Risk which is the risk that the Society’s behaviour results in inappropriate or poor outcomes for customers. The Committee meets to ensure there are robust systems and controls, skills and judgement to ensure positive outcomes for members and stakeholders. The Committee ensures compliance with the FCA Conduct of Business Rules, by reviewing and monitoring the Society’s conduct risk appetite, conduct risk register and conduct risk key risk indicators (KRIs).

Operational Risk Committee

This Committee considers operational risk, which is the risk of loss through inadequate or failed internal processes or systems, including human error or external events. The Committee ensures the risk register reflects these risks, identifying appropriate mitigation for likelihood and severity. The Committee ensures ongoing identification, control and mitigation of risks in the business.

Retail Credit Risk Committee

Retail credit risk arises when unexpected losses are incurred through non-repayment of mortgage lending. This Committee is responsible for monitoring the Society’s high level policy on lending. This includes ensuring the mortgage assets stay within agreed Board-approved levels, including reference to the PRA’s Specialist Sourcebook for Building Societies. The Committee also ensures oversight and challenge to our underwriting policy and long-term credit risk approach. The Committee reviews the Society’s Lending Policy Statement, ensuring this aligns with our Risk Tolerance and Culture Policy; it then recommends this to the Board for approval.

Society Structure 2018

Division of Responsibilities

A.2. There should be a clear division of responsibilities at the head of the company between the running of the Board and the Executive responsibility for the running of the company’s business.  No one individual should have unfettered powers of decision.

A.3 . The Chairman is responsible for leadership of the Board and ensuring its effectiveness of all aspects of its role.

We have separate roles for Chairman and Chief Executive and these are held by different people. Each role has its own job description approved by the Board. No individual has autonomous powers of decision making. The Chairman is appointed by the Board annually.

Role of the Deputy Chairman
Valerie Dias is the Society’s Deputy Chairman. The Deputy Chairman acts as a sounding board for the Chairman and with the Senior Independent Director undertakes the Chairman’s annual appraisal. They also stand in for the Chairman, in the event that the Chairman is unable to attend a meeting or perform their duties.

Role of the Senior Independent Director
The Senior Independent Director is Michelle Tennens. The Senior Independent Director is available for members to refer issues to that they have not been able to resolve via the Chairman, Chief Executive or other Executive Directors or for matters where it is not appropriate to raise these issues directly with these Directors. The Senior Independent Director also assists the Deputy Chairman in performing the Chairman’s appraisal. Michelle is also the Society’s Whistleblowing Champion and provides an independent point of contact for members of staff who may wish to raise issues.

Role of the Executive team
The Executive Team work with the Chief Executive and Board to ensure the effective implementation of strategies and policies within agreed budgets and timeframes. They hold a leadership role within the business, acting to ensure the correct culture is developed and that the relevant resources, people and systems are utilised efficiently and towards the aims of the corporate strategy and policies set by the Board. They are also responsible for the development of employees, delivering consistent high quality customer service standards, implementation of effective systems within the business and reporting and tracking progress towards our key performance indicators and key results indicators. The Executive Team is also responsible for designing, operating and monitoring risk management systems and controls.

Non-Executive Directors
A.4. As part of their role as members of a unitary Board, Non-Executive Directors should constructively challenge and help develop proposals on strategy.

The Non-Executive Directors of the Society are drawn from a wide range of backgrounds to ensure that the Board has the appropriate skills, knowledge and experience to provide a robust level of challenge and debate. The role requires an understanding of the risks in business, commercial leadership within a framework of prudent and effective risk management controls and the ability to monitor performance and resources whilst providing support to the Executive in developing the Society. On 25 October 2018 Fiona Ryder was appointed to the Board as Non-Executive Director. The Society has a succession plan in place for all Non-Executive Director positions.

The Composition of the Board
B.1. The Board and its Committees should have the appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively.

As at 30 November the Board consisted of seven Non-Executive Directors (including the Chairman) and three Executive Directors providing a balance of skills and experience appropriate for the requirements of the Society. The member mix of the Board and Committees is reviewed annually by the Chairman’s and Nominations Committee to ensure that appropriate expertise and skills are maintained. One Non-Executive Director was appointed in 2018, subject to appointment at the AGM. One Executive Director resigned from the Board during 2018 and two Executive Directors were appointed.

In the view of the Board, all of the Non-Executive Directors are independent in character and judgement, are free of any relationship or circumstance which could interfere with the exercise of their judgement, bring wide and varied commercial experience to Board deliberations and continue to represent the interests of the Society’s members.

Appointments to the Board
B.2. There should be a formal, rigorous and transparent procedure for the appointment of new Directors to the Board.

The Society makes Non-Executive Director appointments on merit, based on the specific skills and experience required under the succession plan. The Chairman’s and Nominations Committee meet as necessary to oversee the Board succession plan. The Society appoints an independent executive search agency to identify and shortlist candidates for positions on the Board. This agency follows a methodical process for searching and shortlisting candidates to conduct a broad search of the marketplace. The Chairman’s and Nominations Committee lead the recruitment process, although the Board as a whole makes the final decision. During 2018 Fiona Ryder joined the Board as a Non-Executive Director of the Society.

During 2018 two new Executive Directors were appointed to the Board. Trevor Slater was appointed as Finance Director on 28 June 2018. Ian Brighton was appointed as Operations Director on 1 May 2018.

An external recruitment provider was used for the position of Finance Director. A role specification was prepared setting out the expectations of a new Finance Director and the competency and capability required to assist the recruitment provider’s search. A shortlist of two candidates was agreed. Both candidates attended the Society’s Head Office and met with members of the Senior Management Team. The candidates were then asked to give a presentation to the Society’s Non-Executive Directors. The presentation was followed by a full interview. Trevor Slater was appointed at the end of this process by the Non-Executive Directors.

Ian Brighton was promoted to the role of Operations Director. Ian previously held the position of General Manager (Operations) at the Society. He has been employed by the Society since 2003.

All Directors must meet the tests of fitness and propriety designed by the Financial Conduct Authority and Prudential Regulation Authority and all Directors are required to be notified to the regulators. All Directors undergo basic DBS checks prior to appointment. Senior Managers (including Non-Executive Directors) with responsibilities for specific areas of business allocated to them are required to be pre- approved by the Regulator.

The Society is committed to diversity and currently has a 30% (2017: 25%) female representation on the whole Board and is therefore aligned with the recommendations of the Davies Report which, for diversity purposes, has set a minimum target of 25% female representation. In 2018 the Society signed up to the Woman in Finance Charter to signify its commitment to diversity.

Commitment
B.3. All Directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

The Chairman’s and Nominations Committee evaluate the ability of Directors to commit the time required for the role, prior to appointment. The formal appraisal process carried out by the Chairman each year also assesses whether Directors have demonstrated this ability during the year. Set out following are details of the Directors during 2018 and their attendance record at Board meetings and relevant Board Committee meetings in the year.

The number in brackets is the maximum number of scheduled meetings that each Director was eligible to attend.

Table of attendance 2018

It should be noted that in addition to attendance at the above meetings both Executive and Non-Executive Directors have been invited on occasions to attend Committees of which they are not members.

Development
B.4. All Directors should receive induction on joining the Board and should regularly refresh their skills and knowledge.

The Society provides a formal induction for Non-Executive Directors tailored to their individual needs. This induction has recently been refreshed. The induction programme includes the nature of building societies, the wider financial services industry, Director’s responsibilities and duties, the management information they will be provided with and how to interpret this, information on the Society and its local market, an overview of the regulatory requirements together with details of any significant current issues for the industry. The Chairman ensures that Non-Executive Directors continually update their skills and knowledge to fulfil their role on the Board and Committees. Training and development needs are identified as part of the annual appraisal of the Board and individual Director performance and effectiveness; these needs are usually met by attendance at industry seminars and conferences, internal briefings and specialist speakers.

Information and support
B.5. The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The Chairman ensures that the Board receives information sufficient to enable it to discharge its responsibilities. Each Committee of the Board is responsible for evaluating the effectiveness of the information received and improvements are made where necessary. Board information is subject to on going review to ensure that it meets the needs of the Board in the current and future environment. The Executive Directors and/or the Secretary ensure that information requests are delivered in accordance with the requests of the Board.

Evaluation    
B.6. The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.

Each Director has an annual performance appraisal carried out by the Chairman. The Chairman’s performance is facilitated through the Deputy Chairman and Senior Independent Director taking into account the views of all the Directors. The Chairman gives feedback to the Board on general issues of performance improvement following the appraisal process to allow it to review its own performance. The Board evaluates its overall performance and that of its Committees each year.

Re-election
B.7. All Directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

The Society’s Rules require that all Directors be submitted for election at the Annual General Meeting (AGM) following their appointment to the Board and accordingly Fiona Ryder, Trevor Slater and Ian Brighton stand for election in March 2019.

Each Non Executive Director is appointed to the Board for a term of up to three years, subject to satisfactory performance. After three terms the Board is required to review and satisfy itself of the continued independence of judgement and character of a Non-Executive Director prior to re-election. At the 2019 Annual General Meeting Michelle Tennens will have held office for over nine years. Michelle Tennens will retire from the Board in March 2019 and will not stand for re-election.

Financial and business reporting
C.1. The Board should present a balanced and understandable assessment of the company’s position and prospects.

The responsibilities of the Directors in relation to the preparation of the Society’s accounts and the statement that the business is a going concern are contained in the Directors’ Report on page 8 and Directors’ Responsibilities on page 24 of the Annual Report.

Risk management and internal control
C.2 The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.

The Directors have a responsibility, both under the Building Societies Act and the Financial Services and Markets Act, to establish and maintain systems of control appropriate to the business. The Executive Team is responsible for designing, operating and monitoring risk management systems and controls. During the year the Society embedded the ERMF which had been implemented the previous year. The principal risks faced by the Society are set out in the Directors’ Report starting on page 8. Each Board and management committee is responsible for the risks and controls within its remit.

The Board Risk and Compliance Committee assess the adequacy of this process on behalf of the Board. The Internal Auditor provides independent assurance to the Board on the effectiveness of the system of internal control through the Audit Committee. The Board has reviewed the effectiveness of the ERMF and concluded that the Society has a strong risk management and compliance culture and that the current framework is effective and appropriate for the size and complexity of the business.

The information received and considered by the Audit Committee provided reasonable assurance that during the financial year there were no material breaches of control or regulatory standards, and that overall, the Society maintained an adequate system of internal control.

Audit Committee and Auditors
C.3. The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

The role and membership of the Audit Committee have been set out earlier in the Corporate Governance Report. The Society has engaged the Auditors historically for non-audit services which includes advice on corporation tax issues. The Board has a policy relating to the engagement of external auditors to supply non-audit services, the purpose of which is to ensure the continued independence and objectivity of the External Auditor.

Remuneration
D.1 Executive Directors’ remuneration should be designed to promote the long term success of the company. Performance- related elements should be transparent, stretching and rigorously applied.

The Directors’ Remuneration Report on page 22 of the Annual Report explains how the Society complies with the Code Principles relating to remuneration.

Dialogue with shareholders
E.1. There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

The Society does not have shareholders in the same way as a listed company; as a mutual society our members are our shareholders. The importance of listening to and engaging with members in the Society’s activities is an important part of its culture. We endeavour to elicit their views on the products and service being offered by the Society through market research and dialogue with our staff. We hold members events and do all we can to encourage members to attend and ask questions at the Annual General Meeting (AGM).  

Constructive use of the Annual General Meeting (AGM)
E.2. The members of the Board should use the AGM to communicate with members of the Society and to encourage their participation.

Each year the Society sends details of the AGM and voting forms to those members eligible to vote. The resolutions include receipt of the Report and Accounts, election and re-election of Directors, the Director’s Remuneration Policy, and any other relevant matters. Members are provided with forms and given online access, which enable them to appoint a proxy to vote on their behalf if they are unable to attend in person. The distribution of AGM notices (with at least 21 clear days’ notice) and the receipt and counting of proxy votes is carried out by independent scrutineers. At the AGM a poll is called in relation to each resolution and the proxy votes cast are included in the result. The results are subsequently disclosed on the Society’s website.

The Society is keen to encourage as many members as possible to attend the Annual General Meeting as this gives the opportunity for members to meet the Society’s Directors and Executive Team to discuss issues that are of concern. The Chairmen of all the Committees are also available to answer any questions.

On behalf of the Directors
Alan Harris
Chairman
8 February 2019

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