Setting new standards - Friends Life

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CORPORATE GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY REPORT DIRECTORS AND MANAGEMENT Governance Operational responsibility within the Group ultimately rests with the Group Chief Executive and is devolved through an executive structure with clearly delegated and appropriate levels of authority. In particular, the Chief Executive of F&C has operational responsibility to the Board of F&C and its shareholders, reporting appropriately to the Board of the Company as controlling shareholder. Members of Group management are, therefore, accountable for the operation of the systems of internal control within the Group’s core businesses. Business unit management is responsible for putting in place the ongoing management and monitoring disciplines for risks and activities under its control. The structure is designed to provide clear responsibilities and control for key areas of the Group’s business, and includes ‘whistleblowing’ procedures to enable staff to raise concerns in confidence. Through these mechanisms, the performance of the business is monitored, risks are identified in a timely manner, their financial implications assessed, control procedures re-evaluated and, where appropriate, corrective actions agreed and implemented. The Group’s governance structures for risk management are based on three lines of defence. Primary accountability for managing risk lies with the business units, and with those specialist functions that are responsible for specific operational processes, such as Human Resources, IT and Facilities Management. A second line of defence is provided by the independent Group Risk function, and those specialist functions that undertake policysetting and monitoring roles, such as Compliance and Legal. The third line of defence is provided by Internal Audit, which has responsibility for providing independent assurance over the risk management process and the internal controls environment. The diagram below illustrates the governance structure for risk management including the interaction of various committees with the Board of the Company and its subsidiaries. The boards and the risk committees within the Group have terms of reference that describe their roles in the identification, assessment, management and monitoring of risk. The Board: • is responsible for the risk management framework and for setting high level risk policy and risk appetite; • has delegated to the Group Risk Committee authority to approve the risk framework of the UK Life & Pensions business and to endorse the risk frameworks of the other operating subsidiaries; and • receives quarterly reports from the Group Risk function summarising the Group’s key risks and the actions in place to control them, and a brief monthly update on the key risks and issues as part of its regular management information. Governance structures for risk management FP plc Board FP plc Audit & Compliance Committee Risk information flows Board Committee Risk function Business Group Risk Committee Group Risk Function Financial Risk Committee FPLP Board FPIL Board Lombard Board F&C Board Operational Risk Committee FPIL Risk Committee Lombard Risk Committee F&C Management Committee FPIL Risk coordinator Lombard Risk coordinator F&C Risk function FPLP Business units FPIL Business units Lombard Business units F&C Business units 54 Friends Provident Annual Report & Accounts 2006
DIRECTORS’ REPORT CORPORATE GOVERNANCE REPORTS The Group Risk Committee: • is chaired by the Group Chief Executive and is responsible for developing, sponsoring and monitoring the risk management activities and processes of the companies within the Group; • has authority to approve policies for the management of strategic and reputational risks and for those risks that arise from membership of a group of companies (called enterprise risks); • approves the risk management frameworks of the Group’s UK Life & Pensions business; and • receives quarterly reporting from the operating subsidiaries, summarised by the Group Risk function. Within the UK Life & Pensions business, the boards of the principal operating companies: • oversee the management of strategic risk; • have established a Financial Risk Committee and an Operational Risk Committee, which include executive directors and other relevant senior managers; and • receive a quarterly summary of operational and financial risk and a detailed report of strategic risk from the Group Risk function. The Financial Risk and Operational Risk Committees: • receive detailed quarterly reporting from the Group Risk function in respect of the significant risks within their respective remits, together with details of activities to improve the control environment where necessary; • oversee the implementation of detailed risk appetite for the risks within their respective remits; and • have delegated authority to approve the policies for, and oversee the management of, financial and operational risk respectively. Within the International business, FPIL and Lombard have risk committees comprising executive directors and other relevant senior managers that oversee their risk management processes and report into their respective boards. These committees provide quarterly reports to the Group Risk function. The boards of FPIL and Lombard are authorised to determine their respective policies for the management of risk, subject to the oversight of the Group Risk Committee. The board of F&C determines its policy for the management of risk and, in conjunction with management, identifies the major risks in the Asset Management business and reviews and agrees procedures to control these risks, where possible. Quarterly reports are prepared by each of the F&C business units, across all locations. The F&C Management Committee, which includes all executive directors of F&C, discusses these reports and all significant items are identified and reported to the F&C board on a regular basis. F&C provides a quarterly summary of its key risks to the Group Risk function. The risk management arrangements within F&C are described in detail in the F&C Annual Report and Accounts. Independence of external auditors The Combined Code requires the Company to explain the process to ensure that auditors’ objectivity and independence is safeguarded in their provision of non-audit services to the Company. The Audit and Compliance Committee evaluated the independence of the external auditor and satisfied itself of its integrity, competence and professionalism. Having given full consideration to the Committee’s evaluation, the Board has satisfied itself that during the year, no aspect of the work of the independent auditor was impaired on these grounds. In maintaining a clear perception of independence and balancing that with the best interests of the Company, the Board has also considered the policy for awarding audit-related and/or non-audit work to the Group’s external auditor. The Company does not impose an automatic ban on any Group company’s external auditor undertaking non-audit work. The Group’s aim is always to have any non-audit work carried out in a manner that affords best value for money. The auditor must not be in a position of conflict in respect of the work in question and must have the skill, competence and integrity to carry out the work in the best interests of the Company and the Group. In particular, the external auditor is not permitted to: • perform work that involves the valuation of an asset or liability incorporated into any of the Company’s financial statements; • act as secondees to positions of influence within the Group; • design and implement systems that have financial implications; • provide internal audit services where an opinion has to be given on management’s assessment of accounting controls and financial systems; • provide litigation support services; • provide corporate finance services; and • advise on senior executives’ remuneration. The auditor of the Company is permitted to perform audit-related and non-audit work in areas where, in the opinion of the Audit and Compliance Committee or its Chairman, it is appropriate for it to do so and there are no actual or perceived independence issues. The Chairman of the Audit and Compliance Committee is authorised to approve the use of auditors for audit-related and nonaudit work provided that the cost does not exceed £100,000 and the aggregate value of audit-related and non-audit work awarded to auditors does not exceed the audit fee for the financial year in question. In other circumstances, the approval of the Audit and Compliance Committee is required. Friends Provident Annual Report & Accounts 2006 55
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Setting new standards Friends Provi
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ANNUAL REVIEW CORPORATE GOVERNANCE
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Friends Provident plc Pixham End Do
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Setting new standards - Friends Life

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