Setting new standards - Friends Life

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CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY REPORT DIRECTORS AND MANAGEMENT Reporting to shareholders The Company places considerable importance on communications with shareholders and responds to them on a wide range of issues. It has an ongoing programme of dialogue and meetings with major institutional shareholders, where a wide range of relevant issues including strategy, performance, management and governance are discussed. Further, the Chairman and the senior independent director are available to meet major shareholders and the Chairman writes annually to the 20 largest shareholders, emphasising his availability should they wish to meet with him. During 2006, no such meetings with the Chairman were requested by shareholders. Twice during the year, the Chairman and the directors met with the Company’s joint brokers, JPMorgan Cazenove and Merrill Lynch, following completion of the executive presentations to major shareholders. This helps the non-executive directors to maintain an up-to-date understanding of the views of major shareholders. At its AGM, the Company complies with the provisions of the Combined Code relating to the disclosure of proxy votes, the separation of resolutions and the attendance of directors, particularly committee chairmen. The timing of the despatch of the formal notice of the AGM complies with the Combined Code. The outcome of every general meeting of shareholders, including detailed voting results and votes withheld, is published on the Company’s website following the close of the meeting. Institutional investors As an institutional investor, the Company aims to exercise wise stewardship over the companies in which it invests. The Company’s approach to socially responsible investments has been enhanced by the Responsible Engagement Overlay (reo ® ) developed by the Company’s fund manager, F&C, which complies with the principles set out in the Institutional Shareholders’ Committee’s Code of Activism, including comprehensive and considered voting and dialogue, where appropriate, with investee companies. The Company’s policy on socially responsible investment can be found on the corporate website www.friendsprovident.com/sri, which also includes the voting reports, voting policy and latest newsletter. Internal controls and risk management The Group has in place an ongoing process for identifying, evaluating and managing the significant risks it faces. The Board regularly reviews the process through the risk committee structure and confirms that it complies with the ‘Internal Control: Revised Guidance for Directors On The Combined Code’ published by the Financial Reporting Council and the ABI Disclosure Guidelines on Socially Responsible Investment, which focus on social, ethical and environmental (SEE) risks. The Board of the Company is ultimately responsible for the Group’s systems of internal control and for reviewing their effectiveness. These systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, as no business can be successful without taking some risk. They can thus provide reasonable but not absolute assurance against material mis-statement or loss. The Board has conducted an annual review of the effectiveness of the Group’s systems of internal controls and risk management. The Company’s Audit and Compliance Committee has also received: • a review of the operation of the Group’s risk management framework from the Group’s risk management function; • a report from the Group’s independent internal audit function of the framework’s effectiveness; and • assurances from the Group Risk Committee that the risk committees within the operating subsidiaries have reviewed the effectiveness of the internal controls and risk management activities within their respective remits. These reports commented on the controls that had operated during the year under review and where any significant failings or weaknesses were identified, actions have been taken or are being taken to remedy them. Through this process, the Audit and Compliance Committee was able to recommend to the Board the approval of the statements concerning internal controls and risk management statements. 52 Friends Provident Annual Report & Accounts 2006
DIRECTORS’ REPORT CORPORATE GOVERNANCE REPORTS Risk management The Group seeks to take appropriate and managed risks in order to make superior returns for its shareholders and customers. The Board’s vision for risk management is an environment where business managers can take risks with confidence, and where consideration of risk is embedded into business planning, decision-making and everyday management. It seeks to have in place the people, processes and systems to: • identify and understand the risks facing the business; • select the appropriate risks to accept, and price correctly for them; • avoid, mitigate or transfer the inappropriate risks; and • monitor the business’s risk profile against agreed risk appetite. Risk appetite Risk appetite is an expression of the level of acceptable and/or unacceptable risk and is determined by the Board and senior management. The Group’s willingness to take on risk is set with reference to its capacity to bear risk. The Board has set risk appetite for the Group as a whole, and has approved more detailed appetite statements for the individual businesses. Qualitatively, risk appetite is set within a range from ‘risk seeking’ to ‘zero tolerance’, which varies according to the type of risk. Risk categorisation Risks are categorised as strategic, financial or operational. Details of specific risks currently facing the Group in the achievement of its strategy are given in the Annual Review on pages 15, 21 and 27. Strategic risks are those arising from the choice of a particular strategy, or with external forces acting to impair the Group’s ability to realise its strategy. The Board’s appetite for strategic risk varies from risk seeking, for example in relation to finding and exploiting new applications of technology, to risk averse, for example in relation to actions or events that could damage the Group’s reputation. Financial risks arise from changes in financial risk factors and include credit, insurance, liquidity and market risks. The Board’s appetite for the different categories of financial risks can vary by risk type, by company within the Group and by the funds or assets concerned. More details of financial risk appetite are included in note 30 to the consolidated accounts. Operational risks can arise in the Group’s internal processes and systems, through its people or from external events. The Board aims to build an appropriate control environment to keep the exposure to operational risks in line with the agreed risk appetite, recognising that operational risks may arise in the normal course of business even when carried out in line with the Group’s policies and applicable regulation. Risk processes Operational risk is identified and evaluated within business units using a risk and control self-assessment process. Risks are recorded on an operational risk database, along with details of the controls in place to manage the risks and any remedial actions necessary to improve those controls. Risks are managed as closely as possible to the source of the risk. The strategic and financial risk processes are aligned to the business planning process, with risk being identified and evaluated in relation to the achievement of business objectives. The processes are run centrally by the Group Risk function in cooperation with key business units. Risks within business change activities are identified and evaluated by the management of the change programme both in relation to the delivery of the programme and in terms of the change programme’s effect on the business as a whole. Specific risk identification and assessment methodologies have been developed for merger and acquisition and strategic investment opportunities, new product developments and general project and change management programmes. The risk governance and management structures described below apply to all the risks facing the Group, including those that arise from social, environmental and ethical matters. More information about the Group’s performance in relation to these matters can be found in the Corporate Social Responsibility Report on pages 40 to 43. Friends Provident Annual Report & Accounts 2006 53
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Friends Provident plc Pixham End Do
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