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Corporate governance report

It is about ensuring that we run the Company with integrity and transparency. In this report Simon Barratt, General Counsel, explains how the main and supporting principles of the June 2008 Combined Code on Corporate Governance (which is available at www.frc.org.uk) are being applied.

Did Whitbread comply with the Combined Code?

During the year the Company complied with all provisions set out in Section 1 of the Combined Code with the exception of A.4.1, which deals with the membership of the Nomination Comittee. The Board believes that the membership of the Committee was appropriate for the activities it carried out during the year and detailed information on these activities can be found here.

How did the Board satisfy itself of the adequacy of its governance procedures?

The General Counsel prepared a full report on the Company's governance arrangements, which was considered at the January Board meeting. In addition, the Company takes the view that corporate governance is not a matter for the Board or its committees alone and has developed a Code of Conduct for employees. This covers dealings with customers, suppliers and government officials; safeguarding the Company's assets; keeping accurate and reliable records; and avoiding conflicts of interest. Its principal message is that all employees must observe a code of conduct based on honesty, integrity and fair dealing. The code was updated during the year.

Details of how Whitbread has applied the main and supporting principles of the Combined Code with regard to remuneration can be found in the Remuneration report. In addition, details of the membership and activities of the Remuneration Committee can be found here.

The Board

Who is on the Board of directors?

The Board currently comprises the Chairman, three executive directors and five independent non-executive directors, one of whom has been appointed Senior Independent Director. Biographies of each of the Directors are set out in Board of directors.

Anthony Habgood, Alan Parker and Christopher Rogers all attended Audit Committee meetings although they are not members of that committee. Alan Parker attended Remuneration Committee meetings (except when his own remuneration was being discussed), but is not a member of the Remuneration Committee.

(1) Richard Baker was appointed as a director on 7 September 2009. Six Board meetings and one Audit Committee meeting were held after that date.
(2) Wendy Becker was absent from one Audit Committee meeting due to work commitments.
(3) Philip Clarke was absent from two Board meetings due to illness and one Board meeting due to work commitments abroad.
(4) Charles Gurassa resigned as a director on 7 September 2009. Five Board meetings and two Audit Committee meetings were held up to that date.
(5) Stephen Williams was absent from one Board meeting due to work commitments.
(6) Number of meetings includes three Chief Executive Succession Committee meetings.

Is there clarity between the roles of the Chairman and Chief Executive?

The roles of Chairman and Chief Executive are separate, with responsibilities clearly divided between them.

The Chairman is responsible for:

• running the Board and setting its agenda;
• ensuring, through the General Counsel, that the members of the Board receive accurate, timely and clear information and that there is a good flow of information;
• managing the Board to ensure that sufficient time is allowed for the discussion of complex or contentious issues;
• ensuring that the directors continually update their knowledge and capabilities;
• ensuring that the members of the Board develop an understanding of the views of the major investors; and
• the annual evaluation of the performance of the Board and its committees and implementing the action required following such evaluation.

The Chief Executive is responsible for:

• setting the strategic direction for the Company;
• overseeing the day-to-day management of the Company;
• the line management of senior executives;
• the activities of the Whitbread Directors' Forum - a group of the Company's most senior executives; and
• ensuring effective communication with shareholders and employees.

How does the Board demonstrate independence?

The Board is committed to ensuring a majority of directors are independent. The non-executive directors all act in an independent and challenging manner at meetings. Additionally, the Combined Code lists a number of circumstances that might call the independence of a director into question and the Board is satisfied that no such circumstances exist for any of the Company's non-executive directors.

How does the Board operate and what were its key activities during the year?

The Board holds meetings regularly and, additionally, for specific purposes, as and when required. During the year there were 11 Board meetings. Attendance by directors at Board meetings and Board committees is set out in the table here . Before each Board meeting directors are given timely and appropriate information, including monthly financial and trading reports.

During the year the Board agreed the business plans for the Group, Hotels and Restuarants and Costa, set the budget for the year, reviewed the half year and full year results, monitored the performance of the businesses and approved significant transactions such as the acquisition of Coffeeheaven.

How does the Board review its performance?

During the year the performance of the Board, and individual directors' contributions to the Board, are appraised by the Chairman. This year each director completed a formal questionnaire on the Board's performance and the Chairman met or spoke to each director on a one to one basis. The performance of the Board's committees was also reviewed during the year.

The results of the review were discussed by the Board and appropriate action plans were agreed. There was a consistently positive response from directors on the effectiveness of the Board and its committees. The main themes arising from the review were around target setting and training. Actions to deal with the points raised have been implemented.

The performance of the Chairman is evaluated during the year by the Senior Independent Director who reviews the Chairman's performance with each of the directors and discusses the results with the Chairman.

How are directors kept up to date with new developments?

During the year directors attended training courses and seminars, or received tailored training, on a number of relevant issues including:

• company law;
• pensions; and
• corporate governance.

The Board receives a regular investor relations report, which includes share price performance, movements in institutional holdings and the reaction of investors to the communications programme.

Internal control

Does the Company maintain adequate systems of internal control?

The Board is responsible for the Group's systems of internal control and risk management, and for reviewing their effectiveness. These systems are designed to manage rather than eliminate risk of failure to achieve business objectives. They can only provide reasonable, and not absolute, assurance against material misstatement or loss.

The Board has established an ongoing process for identifying, evaluating and managing the Group's significant risks. This process was in place throughout the 2009/10 financial year and up to the date of this report. The process is regularly reviewed by the Board and accords with the internal control guidance for directors in the Combined Code. A report of the key risks can be found in Group risks and uncertainties.

Key elements of the Group's risk management and internal control system include:

• the formulation, evaluation and annual approval by the Board of business plans and budgets. Actual results are reported monthly against budget and the previous year's figures. Key risks are identified and action plans prepared accordingly;
• the production by each business of a risks and controls matrix, covering major risks and plans which are considered regularly by the management boards and form the basis of the Group risks matrix considered by the Audit Committee;
• a regular review by the Board of changes in the major risks facing the Group and development of appropriate action plans;
• the consideration of risks and appropriate action plans, when appraising and approving all major capital and revenue projects and change programmes. A post completion review of each major project is undertaken;
• financial policies, controls and procedures manuals, which are regularly reviewed and updated;
• the limits of authority, which are prescribed for employees. Whitbread's organisational structure allows the appropriate segregation of tasks;
• the Code of Conduct, which is communicated to employees;
• the PwC operational audit team activity, which reports on the effectiveness of operational and financial controls across the Group;
• The Audit Committee regularly reviews the major findings from both operational and external audit. Further details can be found here.

Management and specialists within the finance department are responsible for ensuring the appropriate maintenance of financial records and processes that ensure all financial information is relevant, reliable, in accordance with the applicable laws and regulations, and distributed both internally and externally in a timely manner. A review of the consolidation and financial statements is completed by management to ensure that the financial position and results of the Group are appropriately reflected. All financial information published by the Group is subject to the approval of the Audit Committee.

The Board, acting through the Audit Committee, has directed the work of PwC's operational audit team towards those areas of the business that are considered to be of the highest risk. The Committee approves a rolling audit programme, ensuring that all significant areas of the business are independently reviewed within at least a three year period. The programme and findings of the reviews are continually assessed to ensure they take account of the latest information and, in particular, the results of the annual review of internal controls. The effectiveness of the operational audit team is reviewed annually by the Committee. The Committee considers the principal risks identified by the risk management process which are also considered by the main and management boards throughout the year.

Board committees

What committees does the Board have?

The Company has an Audit Committee, a Nomination Committee and a Remuneration Committee. The committees operate within defined terms of reference, copies of which can be found on the Company's website: www.whitbread.co.uk. The Board is satisfied that at least one member of the Audit Committee has recent and relevant financial experience but has determined not to identify any individual as having such experience.

Audit Committee

The Audit Committee comprises three non-executive directors under the chairmanship of Simon Melliss who is Group Financial Director of Hammerson PLC. Richard Baker replaced Charles Gurassa on this committee when he retired from the Board.

The Committee generally holds three meetings in a year. In October and April each year the Committee considers the half and full year financial statements respectively. As part of that process the management team present the statements to the Committee with the external auditors (Ernst & Young) and operational auditors (PwC) present. Ernst & Young present a paper on the audit/review process and the main points of discussion that have arisen. PwC report on the internal audits carried out in the respective periods.

In March each year the Committee considers internal control processes including Treasury, Tax and retail audit reports along with a Group risk analysis.

The terms of reference of the external and operational audits are considered each year along with the effectiveness of the Committee itself. The Committee also meets with both the external and operational auditors without the executive team being present.

Remuneration Committee

The Remuneration Committee's role is to assist the Board in determining the remuneration of the executive directors and the Chairman, approving the executive incentive schemes and monitoring the remuneration of other senior executives. Full details of the Committee's work are set out in the remuneration report.

Nomination Committee - Chief Executive succession

It was announced in early March that Andy Harrison will succeed Alan Parker as Chief Executive when he retires in November 2010. A Committee of the Chairman and all the non-executive directors was set up to oversee the selection process. The recruitment firm, Spencer Stuart was appointed by the Committee. Following a review of their initial report, a list of candidates was compiled and a series of interviews with each candidate was held in January and February. Psychometric assessments were carried out and references were taken. At a meeting of the Committee on 24 February 2010, it was unanimously agreed that Andy Harrison be recommended to the Board for the role of Chief Executive. At a Board Meeting on 3 March 2010 the Chairman made a formal proposal (which was seconded by Alan Parker) that Andy Harrison be appointed as Chief Executive Designate, joining the Company on 1 September in that role and then as Chief Executive on 25 November 2010 on Alan Parker's retirement. This proposal was unanimously agreed and Andy's appointment was publicly announced.

Nomination Committee - General

The Nomination Committee assesses the level of experience and capability of the Board and makes recommendations to the Board on new appointments. During the current year it recommended the appointment of Richard Baker having appointed an external search consultancy. The appointment followed the retirement of Charles Gurassa. Richard Baker was chosen for his wealth of experience in customer-facing industries and his experience at senior Board level.

Shareholder relations

Any shareholder may contact the Chairman or, if appropriate, the Senior Independent Director to raise any issue, including those relating to strategy and governance. Alternatively, shareholders may raise any such issues with one or all of the non-executive directors of the Company. The General Counsel can facilitate any such communication if requested.

Recent topics of interest to investors have been the performance of Premier Inn during the recession and its growth in the UK.

How does the Company interact with institutional investors?

Institutional shareholders, fund managers and analysts are briefed at regular meetings and presentations. Following the full year and interim results in April and October respectively, the Chief Executive and the Finance Director have meetings with institutional investors. An Investor Day was held on 28 January 2010, at which presentations were made by the Chief Executive, Finance Director and the Managing Directors of the businesses. A large number of investors attended. The Chairman and a non-executive director were also present at that meeting. The Chairman also had meetings with a number of the largest shareholders in the Company during the year and spoke to them following the announcement of Andy Harrison's appointment. At the annual Board Strategy meeting on 17 November 2009, reports were presented which described the views of major shareholders of the Company and its current strategy. It is therefore believed that the Board, including the Senior Independent Director, has an adequate understanding of the issues and concerns of major shareholders. No other meetings have been requested by shareholders with the Chairman or Senior Independent Director. Non-executive directors are able to attend these meetings and would do so if requested by major shareholders.

How does the Company interact with private investors?

Annual and interim results presentations are webcast live so that all shareholders can receive the same information at the same time. The Company has taken advantage of the provisions in the Companies Act 2006, which allows communication to be made to shareholders electronically unless they have requested hard copy documentation. The Company's website provides comprehensive information for private shareholders, with the Annual Report and Accounts, trading statements, interim management statements and public announcements all being available at www.whitbread.co.uk.

Private shareholders have the opportunity to put questions to the Board at the Annual General Meeting and at all other times by emailing or writing to the Company. Wherever possible, all directors attend the AGM. At the 2010 AGM, all voting will be by poll. Electronic handsets will be utilised and results will be displayed on the screen at the meeting. In addition, the audited poll results will be disclosed on the Company's website following the meeting,and announced by regulatory news service. The information that is required by DTR 7.2.6, information relating to the share capital of the Company, can be found within the Directors' Report.