Transfield Services 2010 Online Annual Report / Working on tomorrow’s governance

Working on tomorrow’s governance

Corporate governance is the system of principles and processes governing the exercise and control of authority within a company. Our governance system aims to:

• ensure appropriate accountability
• minimise business risks
• promote ethical conduct, and
• enhance investor confidence.

Transfield Services continuously monitors governance developments to ensure appropriate and flexible practices are in place to meet industry and market expectations – today and tomorrow. 

We believe there is no single model of good governance. Transfield Services, like any other listed entity, has its own history, values and vision for the future, which are reflected in our Board and corporate structure and our governance systems. These have been designed to encourage the success of Transfield Services and the creation of shareholder value now and in years to come. 

This year, we strengthened our governance systems through our work on crucial new policies including the Anti-Bribery and Corruption Policy and the Political Support and Involvement Policy. We implemented international training initiatives to support the Code of Business Conduct. Our Continuous Disclosure and Communications Policy and Share Trading Policy have been enhanced in light of legal and regulatory developments and reviews of best practice. 

Transfield Services has welcomed the ASX Corporate Governance Council’s position on diversity and measurable objectives relating to gender. We are currently reviewing our policies and practices to reflect our commitment to diversity in all its dimensions.

Transfield Services continues to report on its compliance with the revised ASX Principles and Recommendations in this annual report. We believe we have complied with the ASX Principles and Recommendations during this reporting period, except as outlined and explained in the following.

1.   Board of Directors

1.1      Role and responsibilities

Transfield Services’ Board of Directors (Board) is responsible for the Company’s performance and strategic direction, with the aim of protecting and enhancing shareholder value.

The Board Charter outlines the Board’s role, responsibilities and internal procedures. In summary, specific responsibilities of the Board include:

• Overseeing the Company’s financial integrity, including approving statutory accounts and directors’ reports, monitoring financial performance, approving major borrowings or giving security over assets, and approving the appointment of the internal and external auditor.
• Reviewing and approving business strategy, including approving the Company budget and strategic plans, assessing performance against approved strategies and continued suitability and sustainability of strategies and considering management recommendations on proposed mergers, acquisitions, divestments and capital management.
• Monitoring the identification and management of business risks, including approving material policies for management of business risks and oversight of management of these risks.
• Ensuring effective legal compliance, including monitoring compliance with law and the Company’s contractual obligations, ensuring that an appropriately informed market exists at all times in respect of the Company and ensuring that robust ethical standards are maintained by the Company and that the ‘tone at the top’ is set by the Board and senior executives.
• Ensuring effective governance, including ensuring that the Company maintains appropriate corporate governance practices and overseeing compliance with such practices, and monitoring compliance with major policies and the Code of Business Conduct.
• Making key human resources and remuneration strategy decisions, including approving the appointment and removal of the Managing Director and Chief Executive Officer (MD/CEO) and senior executives, evaluating their performance, determining their fair and responsible remuneration and monitoring their succession planning and monitoring the balance of skills, expertise and experience on the Board, and where appropriate, selecting new directors for the approval of shareholders.

The Board has delegated specific authority to the MD/CEO. Transactions outside the delegated authority framework must be presented to the Board for approval.

The delegated authority framework is embedded within the Board-approved risk appetite statement for the Company, which sets the foundation for an appropriate risk culture within the Company. A summary of the delegated authority framework is available on the Transfield Services website.  

The Board meets as frequently as required, but not less than six times a year.  This year, key activities for the Board included:

• considering and approving the Company’s strategic plan and budget
• reviewing and approving the Company’s actions arising out of TSI Fund’s capital structure review
• considering and approving a Share Purchase Plan, following requests from retail shareholders
• overseeing the issue of US$170 million in the US private debt market as part of ongoing prudent capital management initiatives, and
• overseeing continued Board renewal.

1.2      Board composition and independence

The directors are profiled on pages 14 and 15 of this annual report. Their skills, knowledge, perspective and experience are appropriate to ensure the effective performance of Transfield Services and to address current and emerging industry issues.

The Board comprises eight directors – seven non-executive directors, five of whom are independent and the MD/CEO. The roles of Chairman and MD/CEO are separate. The Chairman is responsible for the leadership of the Board. The Company considers the Chairman to be independent in accordance with the definition of independence contained in the Board Charter.

The Board Charter, guided by the characteristics of independence promoted by the ASX Principles and Recommendations, requires all directors to exercise independent and informed judgment. A key factor in the assessment of independence is whether the director brings an enquiring, open and independent mind to Board meetings, listens to the debate on each issue, considers the arguments for and against each decision and ultimately reaches a decision that he or she believes is in the best interests of the Company.To this end, the Charter facilitates directors having access, where necessary, to independent, external and professional advice at the Company’s expense. Directors also have access to the Chief Risk and Legal Officer/Company Secretary and senior executives for information and support to assist in making informed decisions.

As a guide, the Company considers that where a director’s interest or relationship exceeds a materiality threshold of 10 per cent of revenue, it may be deemed material, depending on the circumstances. The Company reviews directors’ independence on an ongoing basis.

The non-executive directors are all independent, except Guido Belgiorno-Nettis AM and Luca Belgiorno-Nettis AM, who are directors of the founding shareholder Transfield (TSL) Pty Limited, which is part of the Transfield Holdings Group. 

The Chairman, Anthony Shepherd, is continuing his oversight of the Board renewal process to ensure that the composition of the Board reflects industry and market expectations of responsible governance. This financial year, Jagjeet Bindra and Douglas Snedden were appointed as new directors, and Professor Stephen Burdon retired from the Board in July 2010.

Anthony Shepherd is Chairman of ConnectEast Group, which has commercial relationships with the Company. However, this relationship is not considered material. 

1.3    Directors’ terms of appointment and induction

Directors are appointed to the Board on the following terms:

• the terms of appointment are agreed as part of such appointment, although every three years, a third of directors must retire and, if applicable, offer themselves for re-election
• directors will not usually serve more than 10 years except in special circumstances, as the Board may determine
• directors are expected to be available to fulfil their obligations as directors as and when required, and
• directors will comply with the powers and duties of directors set out in the Company’s constitution, Board and Committee Charters and the Corporations Act.

New directors and new senior executives take part in an induction program as an introduction to the Company’s vision, values and functions, as well as its systems, processes and key contacts. The program provides resources to allow directors and senior executives to participate in the Company’s operations at the earliest opportunity.

1.4    Board performance review

Board, committee and director performance is reviewed internally on an annual basis, with an external review undertaken every three years. The internal review process seeks anonymous responses from directors on elements of Board effectiveness, including:

• Board composition and responsibilities
• Board meetings and decision-making
• Board committees
• Chairman’s role
• strategic planning and budgeting
• relationship with management, and
• evaluation and remuneration of directors and management.

Since the last external Board performance review was undertaken in 2007, the Chairman has commenced preparations for engaging an independent advisory body to conduct a review in 2010.

The Chairman, on behalf of the Board, has also recently completed a 360° review with the MD/CEO. This review has highlighted the successful accession to the role of the MD/CEO in the eyes of the Board, the senior executive team and investors.

2.  Board committees

The Board may refer its functions to committees formed to provide advice on specific matters. The committees regularly report to the Board and make recommendations to it. Each committee has a charter governing its functions, composition and procedures.

The number of Board and committee meetings held and director attendance is set out in the directors’ report on page 47 of this annual report.   

2.1    Risk, Audit and Compliance Committee

The Risk, Audit and Compliance Committee (RACC) consists of four non-executive directors (three of whom are independent). It is chaired by Steven Crane – an independent director who is not the Chairman of the Board.

Responsibilities of the RACC include:

• monitoring financial reporting and performance
• overseeing the external and internal audit functions
• ensuring appropriate management of business risks 
• monitoring compliance with the law and responsible governance standards, and
• overseeing investigations of alleged conflicts of interest, major fraud or inappropriate conduct.

The RACC met four times this year and its key activities during the year included:

• reviewing the half-year and full-year accounts
• reviewing and recommending to the Board the risk appetite statement and delegated authority framework
• considering and recommending to the Board the adoption of three new policies – the Anti Bribery and Corruption Policy, the Business Partners Policy and the Political Involvement and Support Policy, and
• monitoring the implementation of the Code of Business Conduct across the organisation.

Transfield Services’ procedures for the selection, appointment, removal and rotation of external auditors follow the relevant statutory requirements. 

The Company’s Non-Audit Services Policy directs the engagement of Transfield Services’ external auditor to supply non-audit services and to ensure that such services do not impair the objectivity and independence of the auditor’s opinion on Transfield Services. The RACC monitors compliance with this policy.

2.2    Health, Safety and Sustainability Committee

The Health, Safety and Sustainability Committee (HSSC) consists of two non-executive directors, and the MD/CEO. It is chaired by Non-Executive Director Guido Belgiorno-Nettis AM.

The HSSC oversees strategies in place to minimise risk in the areas of health, safety, sustainability and environmental performance. Recommendations and significant issues are reported to the Board.

The HSSC met four times this year and its key activities during the year included:

• overseeing the development of the Mandatory Safety Rules and their implementation across the organisation
• overseeing the standardisation of health, safety and environment (HSE) reporting from regional chief executives, and
• monitoring the Company’s response to HSE incidents.

2.3    Human Resources Committee

The Human Resources (HR) Committee is composed of four non-executive directors (three of whom are independent). It is chaired by Independent Director Mel Ward AO, who is not the Chairman of the Board. The MD/CEO is an attendee by invitation and not a member of the Committee.

The MD/CEO does not participate in discussions regarding his own remuneration.

The HR Committee’s responsibilities include:

• ensuring that human resources and remuneration policies comply with the law, reflect current governance practices and mitigate against operational, financial and reputational risk
• developing and reviewing succession planning and talent management strategies
• overseeing recruitment, retention and termination policies for executives, and
• reviewing and approving the design of employee equity plans.

The HR Committee met seven times this year and its key activities during the year included:

• monitoring the development of a medium-term incentive plan
• overseeing succession planning initiatives
• considering and recommending to the Board an increase in fees paid to non-executive directors in light of market information and directors’ level of commitment
• considering the introduction of a minimum shareholding requirement policy for directors and recommending this to the Board, and
• considering incentive schemes to ensure retention of key management.

2.4    Nomination Committee

The Nomination Committee (Committee)comprises directors who are members of the HR Committee, in addition to the Chairman of the Board who chairs the Committee.

The Committee has been established to ensure the Board is structured appropriately and to set and review selection, appointment and performance criteria of directors and senior management, and to oversee the recruitment and appointment of directors.

The Nomination Committee met two times this year to consider changes to the Board, which were implemented during the year.  

3.  Management

3.1    Delegation of authority

The Board delegates operational authority to the MD/CEO subject to specified limits set out in a delegated authority framework.

The MD/CEO then sub-delegates specific authority to executives. Authority delegated to executives must, in certain circumstances, be exercised with the approval of committees made up of senior executives, including Strategic Review Committees (SRC) established in the geographical regions. All significant new business, any new joint venture and any acquisition and investment opportunities are reviewed and approved by the Group Strategic Review Committee (GSRC).

The function of both the GSRC and regional SRCs is to ensure new business is aligned with the Company’s strategic objectives and to ensure that key risks have been assessed and will be managed. 

3.2     Performance evaluation of senior executives

The MD/CEO evaluates senior executives through the Performance Development Review (PDR) process, which is aimed at ensuring that accountabilities, responsibilities and performance are aligned with the future direction of the Company. This process involves:

• a formal review for the current year
• the setting of objectives and a development plan for the following year, and
• a continuous review of performance and development.

Senior executives also participate in a Short-Term Incentive Plan. Details about this plan are set out in the remuneration report on pages 58 to 59 of this Annual Report.

The PDR and Short-Term Incentive Plan evaluations were completed in July 2010 in accordance with the processes disclosed. 

4.  Business Conduct

Transfield Services is committed to ethical and responsible corporate practices and decision-making. The Code of Business Conduct, related training initiatives and a comprehensive policy framework address appropriate practices across the organisation.

4.1    Code of Business Conduct

Transfield Services’ Code of Business Conduct (Code) is a reference guide to ethical and responsible conduct. The Code is aimed at building a workplace culture of integrity in all Transfield Services operations around the world. 

The Code applies to directors, executives and employees as well as contractors, consultants and agents of Transfield Services. The Company’s business partners (including clients, joint venture partners and subcontractors) are expected to meet the standards set out in the Code.

4.2     Training initiatives

Effective training is vital to successfully embed the Code within Transfield Services. In August 2009, Transfield Services commenced the first stage of awareness training on the Code in Australia, New Zealand, North America and the Middle East. More in-depth training commenced in July 2010 and online training will be introduced later in the year. Approximately 550 employees have attended training sessions so far.

4.3    Core compliance policies

Ethical and responsible decision-making is further promoted through the following key policies:

• Share Trading Policy
• Conflicts of Interest Policy, and
• Related Party Transactions Policy.

The Share Trading Policy was amended by the Board in November 2009 following a review of best practice amongst other listed entities. Previously, the Policy contained trading restrictions based on trading windows following the announcement of half-yearly and annual results, and the Annual General Meeting. This was replaced by the introduction of blackout periods, which restricts directors and designated employees buying or selling shares in the Company in periods that run from the end of a reporting period (half-year and full-year) to the reporting date of results for that period. There is also a blackout period for two-weeks prior to the Annual General Meeting. 

The Policy was also amended by the introduction of:

• a requirement for prior notification and approval of intended trades by directors and senior executives
• a prohibition on insider trading in respect of other entities’ securities, and
• a prohibition on short-term speculative trading by directors and senior executives.

Under the existing terms of the policy, directors and employees are prohibited from buying or selling shares in the Company at any time they are in possession of price-sensitive information. The Policy also prohibits directors and selected employees from using Transfield Services shares as collateral in any financial transaction, including margin loan arrangements.

The Conflicts of Interest Policy is aimed at protecting the integrity of the Company’s decision-making processes by avoiding ethical, legal, financial or other conflicts of interest.

The Related Party Transactions Policy provides guidance on recognising and reporting related party transactions, and where necessary submitting these for shareholder approval.

During the year, the Board’s RACC considered the introduction of three new key policies to support the Code of Business Conduct, namely the Anti-Bribery and Corruption Policy, the Business Partners Policy and the Political Involvement and Support Policy. These policies are currently before the Board for approval and will be available on the Company website as soon as they are approved.

5.  Market disclosure

5.1    Continuous disclosure and shareholder communications

Transfield Services aims to support the transparency and integrity of the market through timely and accurate disclosure of material information to shareholders and the investment community in relation to our operations and performance.

The Company’s Continuous Disclosure and Communications Policy sets out obligations and guidelines for disclosure of material information, pursuant to the ASX Listing Rules. In light of legal and regulatory developments, the policy was reviewed and amended in November 2009 to further improve the Company’s processes around disclosure. Legal developments arising out of the James Hardie case highlighted the need to establish appropriate accountabilities for market disclosure at Board level. The revised policy now clarifies this accountability.

The policy also outlines the role of the Company’s Continuous Disclosure Committee (Committee), which is responsible for determining what information must be disclosed and ensuring the Company complies with its disclosure obligations.

The Committee consists of the MD/CEO, Chief Financial Officer, Chief Risk and Legal Officer/Company Secretary and other members invited to join the Committee from time to time. It is scheduled to meet on a weekly basis, but may meet on an impromptu basis where necessary.

This Committee, working with the Corporate Affairs and Investor Relations teams, creates communication plans to ensure Transfield Services’ messages are effectively delivered through various communication channels. The Committee is guided by communications practices outlined in the Continuous Disclosure and Communications Policy.

ASX statements and media releases are a primary source of material information regarding the Company. These announcements are immediately uploaded to the Transfield Services website.

The website also contains information about the Company’s operations, achievements and awards, and features publications and investor presentations. Shareholders can also subscribe to free RSS feeds – communicating the latest ASX announcements via an RSS reader on their computer.

Annual General Meetings are a valuable opportunity to outline the Company’s recent developments and strategy, and for shareholders to comment on Transfield Services’ management and performance. Shareholders also have the opportunity to ask the Company’s external auditor questions relevant to its audit function.

Share trading blackout periods

6.  Risk management

6.1    Risk management framework

As an international business operating in numerous industries, Transfield Services faces a variety of risks that may adversely affect our operations and performance. These include risks associated with:

• economic volatility
• foreign exchange and interest rates
• competition and contract retention 
• contract execution
• industrial incidents
• operating in foreign countries
• recruitment and retention of personnel 
• industrial relations, and
• government policies and regulations.

Recognition and management of risk is one of the core responsibilities of the Board, supporting the Company’s long-term goal of sustainable growth.

Enterprise Risk Management Framework

The Board, through the RACC, requires that management design and implement risk management and internal control systems to manage Transfield Services’ material business risks, and that management regularly reports to the Board on whether the risks are being managed effectively.

Transfield Services maintains a Risk Policy which aims to make managing risk an integral part of good business practice. The Company utilises an enterprise-wide risk management framework reflecting the global positioning of the Company. This framework encompasses risk, compliance and internal audit elements as well as business resilience, a specialist area covering security, crisis and emergency management, and business continuity.  

Transfield Services’ approach to risk management is in accordance with internationally recognised Risk Management Standard ISO 31000:2009, which outlines recommended risk management procedures and processes to implement within an organisation. The Company promotes collaboration between the business by involving employees in the identification and mitigation of risks, increasing the capability of all levels of our organisation to respond to the changing business environment. 

The internal audit function plays a key role in risk management by providing an objective appraisal of the effectiveness of, and compliance with, business processes and controls across Transfield Services.

6.2  Reporting on risk management

The Chief Risk and Legal Officer/Company Secretary is the head of the risk management function, and reports to the RACC and the Board on a quarterly basis as to the effectiveness of the Company’s management of its material business risks. Material findings and recommendations are communicated to the RACC, which then ensures that management effectively responds to the recommendations. The Chairman of the RACC reports key risks and their management to the Board.

The Group General Manager, Compliance and Governance, who reports to the Chief Risk and Legal Officer/Company Secretary, heads the internal audit function and separately reports significant findings to the RACC on a quarterly basis. The Group General Manager, Compliance and Governance has independent access, if required, to the MD/CEO and the Board, via the RACC. 

The MD/CEO and the Chief Financial Officer provide signed letters to the Board, in respect of each full-year and half-year result that the accounts constitute a true and fair view and are based on an appropriate and effective system of risk management and internal compliance and control.

7.  Fair and responsible remuneration

Transfield Services aims to remunerate fairly and responsibly by ensuring reward for performance is competitive in the markets where the Company operates, and aligning executive reward with shareholders’ interests. 

The Company’s principles in relation to director and senior executive remuneration, and the level of remuneration, are set out in the remuneration report on pages 50 to 69 of this Annual Report.

Fees for non-executive directors are calculated on the extent of their involvement at Board and committee level. They are not based on the Company’s performance. The remuneration report contains information about retirement allowances for non-executive directors on page 54. This year, the Company is seeking shareholder approval for an increase in the non-executive directors’ fee pool, from $1,700,000 to $2,000,000. This increase is being sought in order to:

• have greater flexibility and capacity to increase the size of the Board, and
• attract and retain high-calibre directors.

The Company’s policy in relation to the prohibition of hedging remuneration that has been disclosed as ‘at risk’ is contained in the Company’s Share Trading Policy.

8.  ASX principles and recommendations reconciliation

Transfield Services Annual Report 2010 - Working on tomorrow today