Corporate governance

Changes to corporate governance regime

The Board has adopted the Quoted Companies Alliance (QCA) Corporate Governance Code. Our report sets out in broad terms how we comply at this point in time. We will provide annual updates on our compliance with the code.

Principle 1: Establish a strategy and business model which promote long-term value for shareholders

The Company’s strategy is to:

• Resolve the complex legacy legal and regulatory matters as efficiently as possible.
• Return capital to shareholders as efficiently (in time and with taxation considerations in mind) as possible.
• Appropriately mitigate risks of all types affecting the Group.

We will continue to address the legal and regulatory matters that face the Group with focus and determination. To date, we have resolved multiple matters but the largest of our litigation and threatened litigation remain outstanding.

Principle 2: Seek to understand and meet shareholder needs and expectations

The Company remains committed to listening and communicating openly with its shareholders to ensure that its strategy, and its remaining assets are clearly understood.

The Company meets with institutional shareholders and analysts as appropriate and uses its website to encourage communication with private, existing and prospective shareholders. The Company also maintains regular contact with private investors via meetings, email correspondence and via investor forums.

All resolutions proposed at the Company’s Annual General Meetings and General Meetings over the past 3 years have been passed by shareholders.

Private shareholders

The Annual General Meeting (“AGM”) is the main forum for dialogue with retail shareholders and the Board. The Notice of Meeting is sent to shareholders at least 21 days before the meeting. The chairs of the Board and all committees, together with all other Directors, routinely attend the AGM and are available to answer questions raised by shareholders. The results of the AGM are subsequently published on the Company’s corporate website. Private shareholder communication is encouraged and every email and letter receives a personal reply. Please contact investor.relations@watchstonegroup.com or in writing to Highfield Court, Tollgate, Chandler’s Ford, Eastleigh, Hampshire, England, SO53 3TY.

Institutional shareholders

The Directors actively seek to build a relationship with institutional shareholders. Shareholder relations are managed primarily by the Chief Executive Officer, supported by the Chairman, as appropriate. On an ad hoc basis, the Chairman may be invited to speak to shareholders to listen to their feedback and have a direct conversation on any areas of concern.

The Board as a whole is kept informed of the views and concerns of major shareholders by briefings from the Chief Executive Officer. Any significant investment reports from analysts are also circulated to the Board.

To request any meetings please contact investor.relations@watchstonegroup.com.

Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success.

The way our head office engages with their wider stakeholders strengthens their relationships and helps the Group make better business decisions to deliver on our commitments. The Board is regularly updated on its businesses’ wider stakeholder engagement feedback to stay abreast of stakeholder insights into the issues that matter most to them and our business, and to enable the our businesses and the Group Board to understand and consider these issues in decision-making. The Company assesses stakeholders as organisations or individuals who have “a reasonable expectation of being significantly affected” by the Group’s activities or products.

Aside from our shareholders, suppliers and customers, our employees are one of our most important stakeholder groups and the Board therefore closely monitors and reviews the results of the employee engagement surveys and other employee feedback initiatives.

Customers and communities

• Reviewed our Modern Slavery Statement to ensure we are not inadvertently supporting any type of modern slavery.

Suppliers

• Undertaken a review of all external supply arrangements to ensure that all aspects of the Group is receiving value for money, including helping our suppliers to transact with us efficiently and growing in line with our future strategic needs.

Modern slavery

• We oppose modern slavery in all its forms and will try to prevent it by any means that we can. We expect anyone who has any suspicions of modern slavery in our business or our supply chain to raise their concerns without delay.
• We promise that we will keep any information provided completely confidential.
• In the light of the Modern Slavery Act 2015 we annually review internal measures to ensure we are doing what we can to prevent slavery and human trafficking in our businesses and in our supply chains. Our policy is available on the Group website.

Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation

Audit, risk and internal control

Financial controls

The Company has an established framework of internal financial controls, the effectiveness of which is regularly reviewed by the Executive Management, the Audit Committee and the Board in light of an ongoing assessment of significant risks facing the Company.

The Board is responsible for reviewing and approving overall Company strategy, approving revenue and capital budgets and plans, and for determining the financial structure of the Company including treasury, tax and dividend policy. Monthly results and variances from plans and forecasts are reported to the Board.

The Audit Committee assists the Board in discharging its duties regarding the financial statements, accounting policies and the maintenance of proper internal business, and operational and financial controls, including the review of results of work performed by the Group controls function.
There are comprehensive procedures for budgeting and planning, for monitoring and reporting to the Board business performance against those budgets and plans, and for forecasting expected performance over the remainder of the financial period. These cover profits, cash flows, capital expenditure and balance sheets. Monthly results are reported against budget and compared with the prior year, and forecasts for the current financial year are regularly revised in light of actual performance.

Non-financial controls

The Board recognises that maintaining sound controls and discipline is critical to managing the downside risks to our plan. The Board has ultimate responsibility for the Group’s system of internal control and for reviewing its effectiveness. However, any such system of internal control can provide only reasonable, but not absolute, assurance against material misstatement or loss. The Board considers that the internal controls in place are appropriate for the size, complexity and risk profile of the Group. The principal elements of the Group’s internal control system include:

• An organisational structure with defined levels of responsibility, which promotes entrepreneurial decision-making and rapid implementation while minimising risks.
• A comprehensive annual budgeting process producing a detailed integrated profit and loss, balance sheet and cash flow, which is approved by the Board.
• Detailed monthly reporting of performance against budget.
• Central control over key areas such as capital expenditure authorisation and banking facilities.

The Group continues to review its system of internal control to ensure compliance with best practice, while also having regard to its size and the resources available.

As part of the Group’s review, a number of non-financial controls covering areas such as regulatory compliance, business integrity, health and safety, risk management, business continuity and corporate social responsibility (including ethical trading, supplier standards, environmental concerns and employment diversity) have been assessed.

Standards and policies

The Board is committed to maintaining appropriate standards for all the Company’s business activities and ensuring that these standards are set out in written policies. Whoever we may deal with, and wherever we may operate, Watchstone is committed to doing so lawfully, ethically and with integrity. It is the responsibility of each and every employee to ensure that this commitment is fulfilled. All employees have both a legal and moral duty to take appropriate measures to identify such situations and attempt to remedy them. We operate a whistleblowing policy to:

• ensure all employees feel supported in speaking up in confidence and reporting matters they suspect may involve anything, improper, unethical or inappropriate;
• encourage all improper, unethical or inappropriate behaviour to be identified and challenged at all levels of the organisation;
• provide clear procedures for the reporting of such matters;
• manage all disclosures in a timely, consistent and professional manner; and
• provide assurance that all disclosures will be taken seriously, treated as confidential and managed without fear of retaliation.

Approval process

All material contracts are required to be reviewed and signed by a senior Director of the respective company and reviewed by our Group General Counsel and/or external counsel.

Principle 5: Maintain the Board as a well-functioning, balanced team led by the Chair

The Board comprises the Non-Executive Chairman and one Executive Director.

The Board is satisfied that it has a suitable balance between independence on the one hand, and knowledge of the Group on the other, to enable it to discharge its duties and responsibilities effectively.

All Directors are encouraged to use their independent judgement and to challenge all matters, whether strategic or operational. During the year ten Board meetings took place.

Key Board activities this year included:

• Input into the strategic plan.
• Continued an open dialogue with the investment community.
• Discussed strategic priorities both at Group level and in our businesses.
• Discussed the Group’s capital structure and financial strategy, including capital investments and the return of capital to shareholders returns.
• Discussed internal governance processes.
• Reviewed feedback from shareholders post full and half year results.

Directors’ conflict of interest

The Company has effective procedures in place to monitor and deal with conflicts of interest. The Board is aware of the other commitments and interests of its Directors, and changes to these commitments and interests are reported to and, where appropriate, agreed with the rest of the Board.

Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities

The Board is satisfied that, between the Directors, it has an effective and appropriate balance of skills and experience, including in the areas of insurance, consumer facing businesses, regulatory and governmental policy, law, finance, innovation, international trading and marketing. All Directors receive regular and timely information on the Group’s operational and financial performance. Relevant information is circulated to the Directors in advance of meetings. The business reports monthly on its headline performance against its agreed budget, and the Board reviews the monthly update on performance and any significant variances are reviewed at each meeting.

All Directors retire by rotation at regular intervals in accordance with the Company’s Articles of Association.

Appointment, removal and re-election of Directors

The Board makes decisions regarding the appointment and removal of Directors, and there is a formal, rigorous and transparent procedure for appointments. The Company’s Articles of Association require that one-third of the Directors must stand for re-election by shareholders annually in rotation; that all Directors must stand for re-election at least once every three years; and that any new Directors appointed during the year must stand for election at the AGM immediately following their appointment.

Independent advice

Each Director has access to the advice and services of the Group Company Secretary as well as external counsel and is able to take professional advice at the Group’s expense.

Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement

The Company is currently not fully compliant with Principle 7 – specifically in connection with Board evaluation processes and succession planning. The reason for this is that historically the Board has not felt that, given the size and unique nature of the Company, a formal Board evaluation or succession plan is an efficient use of Company resources. However, further work is ongoing to ensure full compliance in respect of the Board’s evaluation procedures and actions to be taken. In addition, the Board is evaluating how succession planning and the processes by which it determines board and other senior management appointments evolve.

Remuneration policy

The Board’s policy is designed to promote the long-term success of the Company by rewarding senior executives with competitive but responsible salary and benefit packages combined with a significant proportion of executive remuneration dependent on performance, both short-term and long-term. The Board’s intention is to combine appropriate levels of fixed pay with incentive schemes that provide executives with the ability to earn above median levels for true out-performance. In determining the remuneration policy, the Committee is conscious of both the unusual and challenging circumstances of the Company and the Board’s strategy to simplify and focus the Company on delivering shareholder value as well the importance of the retention of key executives. The remuneration packages for executive Directors comprises the following main elements: basic annual salary – Basic salaries are reviewed by the committee annually to take effect on 1 January. In setting basic salaries the Committee assesses individual responsibilities, experience and performance and considers external market data; annual bonus payments in respect of the performance of the individual, achievement of performance criteria and the individual’s contribution to that performance and the Group calculated as a percentage of salary; and the Distribution Incentive Scheme is focused on the ultimate distribution of capital to shareholders.

Given the scale, complexity and history of the Group, recruitment and retention of key management is of critical importance. In addition, the Board and key management are required to accept an unusual level of risk in respect of the historical circumstances of the Group. Accordingly, the Remuneration Committee believe it appropriate that pay and incentive packages should reflect these factors such that the Group was able to offer above average remuneration to recruit and retain the best people.

In addition, the Chairman in association with other relevant directors, continually monitors the individual contributions of each of the members of the team to ensure that:

• Their contribution is relevant and effective
• That they are committed
• Where relevant, they have maintained their independence

We intend to regularly review the performance of the team as a unit to ensure that the members of the Board collectively function in an efficient and productive manner.

Principle 8: Promote a culture that is based on ethical values and behaviours

The Board aims to lead by example and do what is in the best interests of the Company. The culture of the Group is to go the extra mile for customers, suppliers, shareholders and people. The Directors take special care to ensure expenses and fees are kept proportionate and appropriate at all times. This includes limiting unnecessary foreign trips, voluntarily opting to downgrade business travel where costs are excessive at certain times, negotiating discounts and value for money where ever possible.

Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

Board programme

The Board meets at least ten times each year in accordance with its scheduled meeting calendar.

The Board sets direction for the Company through a formal schedule of matters reserved for its decision. Prior to the start of each financial year, a schedule of dates for that year’s ten Board meetings is compiled to align as far as reasonably practicable with the Company’s financial calendar on the one hand, and its trading calendar on the other, while also ensuring an appropriate spread of meetings across the financial year. This may be supplemented by additional meetings as and when required. During the year up to 30 June 2023, the Board met for its ten scheduled meetings. The Board and its Committees receive appropriate and timely information prior to each meeting; a formal agenda is produced for each meeting, and Board and Committee papers are distributed several days before meetings take place. Any Director may challenge Company proposals and decisions are taken democratically after discussion. Any Director who feels that any concern remains unresolved after discussion may ask for that concern to be noted in the minutes of the meeting, which are then circulated to all Directors. Any specific actions arising from such meetings are agreed by the Board or relevant Committee and then followed up by the Company’s management.

Role of the Board

The Board is responsible for the long-term success of the Company. There is a formal schedule of matters reserved to the Board. It is responsible for overall Group strategy; approval of major investments (whether Capex or Opex); approval of the annual and interim results; annual budgets; dividend policy; and Board structure. It monitors the exposure to key business risks and reviews the direction of all our litigation, annual budgets and performance in relation to those budgets. There is a clear division of responsibility at the head of the Group. The Chairman is responsible for running the business of the Board and for ensuring appropriate strategic focus and direction. The Chief Executive Officer is responsible for proposing the strategic focus to the Board, implementing it once it has been approved and overseeing the management of the Group’s assets.

All Directors receive regular and timely information on the Group’s operational and financial performance. Relevant information is circulated to the Directors in advance of meetings. The business reports monthly on its headline performance against its agreed budget, and the Board reviews the monthly update on performance and any significant variances are reviewed at each meeting.

There is one executive director, Stefan Borson, Chief Executive Officer. He is responsible for formulation of the proposed strategic focus for submission to the Board, the day-to-day management of the Group’s business and its overall trading, operational and financial performance in fulfilment of that strategy, as well as plans and budgets approved by the Board of Directors. The Chief Executive Officer reports to the Company’s Board on issues, progress and recommendations for change. The controls applied by the Board to financial and non-financial matters are set out earlier in this document, and the effectiveness of these controls is regularly reported to the Audit Committee and the Board.

Board committees

The Board is supported by the Audit, Remuneration, Nomination and Disclosure committees. Each committee has access to such resources, information and advice as it deems necessary, at the cost of the Company, to enable the committee to discharge its duties.

Audit committee

The audit committee is chaired by Richard Rose and comprises Richard Rose and Stefan Borson. It meets at least twice a year with attendance from the external auditors and internal personnel as required. The committee is responsible for:

• ensuring that the appropriate financial reporting procedures are properly maintained and reported on;
• meeting the auditors and reviewing their reports relating to the Group’s accounts and internal control systems;
• reviewing and monitoring the independence of the external auditor and the objectives and effectiveness of the audit process; and
• reviewing arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting or otherwise and receiving and dealing with matters reported under these arrangements.

Remuneration committee

The remuneration “committee” is currently Richard Rose and is responsible for reviewing the performance of the executive directors and other senior executives and for determining appropriate levels of remuneration.

Nomination committee

The nomination committee consists of Richard Rose and comprises Richard Rose and Stefan Borson. It meets at least once a year and reviews the size, structure and composition of the Board and makes recommendations on changes, as appropriate. It also gives consideration to succession planning in the light of developments in the business.

Disclosure committee

The disclosure committee consists of Stefan Borson and Richard Rose and is chaired by Stefan Borson. The role of the disclosure committee is to assist and inform the Board in making decisions concerning the identification of information that requires announcement pursuant to the AIM rules for companies and other relevant rules. The disclosure committee meets as necessary to consider all relevant matters. It will in particular meet in advance of the release of all trading statements and other announcements of price sensitive information to ensure that they are true, accurate and complete and to consider if they are fair, balanced and understandable.

The terms of reference of each of the committees are also available on the Company’s corporate website, www.watchstonegroup.com.

The Company will continue to review its governance framework as the business and its future strategy develops.

Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

The Company communicates with shareholders through the Annual Report and Accounts, full-year and half-year announcements, the AGM and one-to-one meetings with large existing or potential new shareholders. A range of corporate information (including all Company announcements and presentations, and the record of all outcomes of General Meetings) is also available to shareholders, investors and the public on the Company’s corporate website, www.watchstonegroup.com

The Board receives regular updates on the views of shareholders through briefings and reports from the Chief Executive Officer and the Company’s brokers. The Company communicates with institutional investors frequently through briefings with management.

September 2023