Corporate Governance Statement
The Board is committed to high standards of corporate governance and believes that a sound governance structure engenders a successful company.
This report sets out how the Board has applied the principles set out in both the Combined Code on Corporate Governance issued by the UK Financial Reporting Council in June 2008 (the ‘2008 Combined Code’) and the new UK Corporate Governance Code issued by the UK Financial Reporting Council in May 2010 (the ‘2010 Governance Code’).
Compliance statement
Throughout the year to December 31, 2010 the Company has, in the Directors’ opinion, complied fully with the provisions set out in Section 1 of the 2008 Combined Code.
Although the 2010 Governance Code only applies to the Company with effect from January 1, 2011, the Board is of the opinion that the Company complied with the provisions set out in the new Code, with the exception of:
(i) the new provision in Schedule A relating to the claw back of performance-related remuneration following a restatement of financial results or misconduct, which will be considered by the Remuneration Committee in 2011; and
(ii) the new provision relating to the annual re-election of Directors. Shire’s Board has considered carefully the provision in the 2010 Governance Code encouraging companies to have annual re-elections for their Board of Directors. Shire’s Board recognises the critical importance of having an effective Board of Directors. Shire’s Board also places the highest importance on active engagement with its shareholders; meetings are held regularly with shareholders and the Board takes account of shareholders’ views. Over the last two years there have been significant changes to the Shire Board with four Non-Executive Directors joining the Board and four Non-Executive Directors leaving the Board during that time. Taking into account the nature of Shire’s business and the long time frames associated with drug development, given the Board’s focus on the development of the Company’s strategy against a background of significant changes to the healthcare sector, and given the recent changes to the Board’s composition, the Board has concluded that annual re-election of Directors would not be conducive to the effective management of these areas of focus. The Board will keep the annual re-election of Directors under careful review, including monitoring the views of shareholders. As regards the 2011 AGM, most of the Board will be standing for re-election at the AGM due to their retirement by rotation in accordance with the Company’s Articles and, in addition, Shire’s two newest Board members will be seeking election by shareholders.
The Board
The Board currently comprises, in addition to the Chairman, two Executive and seven Non-Executive Directors and meets at least five times a year. The Non-Executive Directors bring judgement which is independent to that of management to Board deliberations. The Executive Directors have responsibility for day-to-day business operations.
The Board is responsible for the overall management, strategic direction, maintaining sound risk management and internal control systems, succession planning and performance of the Group. It discharges its responsibilities through regularly scheduled meetings and ad hoc meetings, as may be required. The Board has formally reserved specific matters to itself for determination and approval which include strategic issues, the Group’s risk profile, the annual budget, changes in share capital, approval of the Group’s financial statements, approval of material contracts and succession planning for senior management. In addition, it reviews the Group’s internal controls and risk management policies and approves its Code of Ethics. It also monitors and evaluates the performance of the Group as a whole, through engaging with the Chief Executive Officer, Chief Financial Officer and members of the Leadership Team, as appropriate. Matters not formally reserved to the Board are delegated to Board Committees, whose functions are described below, and to the Leadership Team.
Board members receive detailed information from the Executive Directors, the Company Secretary, members of the Leadership Team and other senior managers to enable them to discharge their responsibilities effectively. All Directors have access to employees in the Company and to the advice and guidance of the Company Secretary and are encouraged to seek independent advice at the Group’s expense, where they feel it is appropriate. The Board is of the opinion that each of its members has the skills, knowledge, aptitude and experience to perform the functions required of a Director of a listed company.
Biographical details of the members of the Board who served during the year and up to the date of this report are shown here.
Independence of Directors
The Board considers William Burns, Dr David Ginsburg, David Kappler, Patrick Langlois, Dr Jeffrey Leiden, Anne Minto and David Stout to be independent Non-Executive Directors. The Board views each of these Non-Executive Directors to be independent of management, independent in judgement and character and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. The Board also considered Dr Barry Price and Kathleen Nealon to have been independent Non-Executive Directors whilst members of the Board.
Mr Emmens and Dr Leiden are both directors of Vertex Pharmaceuticals Inc.; Mr Emmens in an executive capacity and Dr Leiden as a Non-Executive Director. The Board, at the time of re-appointing Dr Leiden in December 2010, concluded in its opinion that Dr Leiden remained independent in judgement and character, his commitment to the Group was undiminished and his performance continued to be effective.
Roles and responsibilities of Chairman, Deputy Chairman, Senior Independent Director, Vice Chairman and Chief Executive Officer
The offices of Chairman, Vice Chairman and Chief Executive Officer are held by different individuals. Those of Deputy Chairman and Senior Independent Director are held by a single Non-Executive Director. The Chairman is responsible for the conduct of the Board and ensures that Board discussions are conducted in such a way that all views are taken into account and so that no individual Director or small group of Directors dominates proceedings. The Deputy Chairman’s role is to provide support and guidance to the Chairman and to deputize for the Chairman as required. The Senior Independent Director is responsible for chairing meetings of the Non-Executive Directors without the Chairman and Executive Directors present, leading the Non-Executive Directors in evaluating annually the performance of the Chairman, attending sufficient meetings with major shareholders to gain a balanced understanding of the issues which are important to such shareholders and any concerns that they may have and being available for consultation with shareholders on any matters of concern. The Vice Chairman’s role is to provide support and guidance to the Chairman, be available for consultation with US based shareholders on any matters of concern and to deputize for the Deputy Chairman. The Chief Executive Officer has the overall responsibility for running the business on a day-to-day basis and chairs the Leadership Team.
The roles and responsibilities of the Chairman, Deputy Chairman, Senior Independent Director, Vice Chairman and the Chief Executive Officer are clearly defined, separate and have been approved by the Board. More details can be found on Shire’s website.
Senior Independent Director
David Kappler is the Senior Independent Director and during the year has chaired meetings of the Non-Executive Directors without the Chairman and the Executive Directors being present.
Board and Committee meetings(1)
The attendance of the Directors at Board and Committee meetings held in 2010 was as follows:
| Audit, | Science & | |||||
|---|---|---|---|---|---|---|
| Board | Board | Compliance & | Remuneration | Nomination | Technology | |
| Directors | (scheduled) | (ad hoc) | Risk Committee | Committee | Committee | Committee |
| Matthew Emmens | 6/6 | 1/1 | – | – | 5/5 | – |
| Angus Russell | 6/6 | 1/1 | – | – | – | – |
| Graham Hetherington | 6/6 | 1/1 | – | – | – | – |
| William Burns | 4/5 | 0/1 | – | 4/4 | – | – |
| Dr David Ginsburg | 3/3 | 1/1 | – | – | – | 3/3 |
| David Kappler | 6/6 | 0/1 | 6/6 | – | 5/5 | – |
| Patrick Langlois | 6/6 | 1/1 | 6/6 | 6/6 | – | – |
| Dr Jeffrey Leiden | 6/6 | 1/1 | – | 6/6 | 5/5 | 3/3 |
| Anne Minto | 3/3 | 1/1 | – | 3/3 | – | – |
| David Stout | 6/6 | 1/1 | 6/6 | – | – | – |
| Former Directors | ||||||
| Kathleen Nealon | 2/3 | 0/1 | 3/3 | 3/3 | – | – |
| Dr Barry Price(2) | – | – | – | – | – | – |
| (1) x/y where ‘x’ is the number of meetings attended and ‘y’ is the number of meetings that could have been attended. For example 2/4 indicates two meetings attended out of a possible four. (2) Dr Price retired from the Board on January 24, 2010 prior to any Board and Committee meetings being held. Due to a conflict with prior commitments some Directors were unable to attend certain meetings. | ||||||
The Chairman and the Non-Executive Directors met five times during the year without the Executive Directors being present.
Supply of information
The Executive Directors and the Company Secretary are responsible for ensuring that detailed information is provided to Board members in advance of any scheduled or ad hoc Board meeting. Before decisions are made, consideration is given to the adequacy of information available to the Board and, if necessary, decisions are deferred if further information is required.
Appointment and re-election of Directors
The Board has authority to appoint any person to be a Director either to fill a vacancy or as an addition to the existing Board. Any Director so appointed must retire and offer himself or herself for election at the next AGM following appointment.
Non-Executive Directors are appointed by the Board ordinarily for a term of two years. At the expiration of the two year term Non-Executive Directors are not required to be re-elected by shareholders (unless the expiration of the term coincides with a particular Non-Executive Director’s turn to retire by rotation), but may be re-appointed by the Board.
The terms of appointment of each of the Non-Executive Directors and the service contracts of the Executive Directors are made available for inspection at the Company’s AGM.
Board performance evaluation
In 2010, the Board considered what would be the most constructive format to use for its 2010 performance effectiveness evaluation, taking into account the fact that an externally facilitated effectiveness review had been conducted in 2009 and that four new Board members had joined the Board since the last review. The Board agreed that the 2010 review should be conducted by the Chairman, facilitated by the Company Secretary. The Chairman engaged with each Board member and the discussion included their assessment of the Board’s effectiveness, including the culture and Board dynamics, whether the right issues were being considered by the Board, the quality of materials provided to the Board, the effectiveness of Board Committees, their views on individual contributions from Board members and also if it would be helpful for individual Directors to have greater understanding of any areas of the business to enable them to discharge their responsibilities more effectively. Mr Emmens shared the key outputs of all these discussions, on a non attributable basis, with the full Board and the Board considered what actions might be taken to enhance the operation of the Board. The Senior Independent Director conducted a similar exercise amongst the Non-Executive Directors, excluding the Chairman, to assess the Board’s views as to the effectiveness of the Chairman. This feedback was shared at a meeting of the Non-Executive Directors, excluding the Chairman, chaired by the Senior Independent Director.
Committees of the Board
The Board has established the Audit, Compliance & Risk Committee, the Remuneration Committee, the Nomination Committee and the Science & Technology Committee (together ‘the Committees’). Each Committee has written terms of reference which have been approved by the Board, and are available on Shire’s website http://www.shire.com/. Details of each Committee are set out below.
1 Audit, Compliance & Risk Committee
The Audit, Compliance & Risk Committee (the ‘ACR Committee’) has been established for the purpose of overseeing the accounting and financial reporting processes of the Group, the audit of its financial statements and the effectiveness of the Group’s risk management and internal control framework. The ACR Committee met on six occasions in 2010. The members of the ACR Committee are all Independent Non-Executive Directors. For further information about the ACR Committee, its membership and activities for the year ended December 31, 2010, please refer to the ACR Committee report.
2 Remuneration Committee
The Remuneration Committee is responsible for developing, reviewing and overseeing the implementation of the Group’s compensation and benefits policy. The remuneration of the Executive Directors and the Chairman is determined by the Remuneration Committee. The remuneration of the Non-Executive Directors is determined by the Chairman and the Executive Directors. The remuneration of the members of the Leadership Team, other than the Executive Directors, is determined by the Chief Executive Officer following discussion with the Remuneration Committee. The members of the Remuneration Committee are all Independent Non-Executive Directors.
The Remuneration Committee met on six occasions in 2010. For further information about the Remuneration Committee, its membership and activities for the year ended December 31, 2010, refer to the Directors’ remuneration report.
3 Nomination Committee
The Nomination Committee is responsible for identifying and nominating, for the approval of the Board, candidates for the Board. The Nomination Committee also ensures adequate succession planning for the Board. The Nomination Committee met five times in 2010. The members of the Nomination Committee, with the exception of Matthew Emmens, are all Independent Non-Executive Directors.
The Nomination Committee retains the services of executive search consultants to assist it in the discharge of its responsibilities, as it considers necessary.
For further information about the Nomination Committee, its membership and activities for the year ended December 31, 2010 please refer to the Nomination Committee report.
4 Science & Technology Committee
The Science & Technology Committee is responsible for periodically reviewing and advising the Board on Shire’s strategic direction and investment in research, development and technology. The Science & Technology Committee met three times in 2010. The members of the Science & Technology Committee are all Independent Non-Executive Directors.
Leadership Team
The Board has delegated the day-to-day management of Shire to the Leadership Team, which operates within clear and formal parameters. The Leadership Team reports to and seeks guidance from the Board on a regular basis and normally meets once a month to deliberate on major business issues. It also considers those matters that are of a size and significance as to require referral to the Board before such matters are referred to the Board for final consideration and decision.
During 2010 the Leadership Team held ten scheduled meetings and four ad hoc meetings. At December 31, 2010 the Leadership Team comprised Angus Russell (Chief Executive Officer) who chaired the Leadership Team, Graham Hetherington (Chief Financial Officer), Michael Cola (President of Specialty Pharmaceuticals), Sylvie Gregoire (President of Human Genetic Therapies), Barbara Deptula (Chief Corporate Development Officer) and Tatjana May (General Counsel).
Directors’ remuneration
The Group’s remuneration policy is described in the Directors’ remuneration report . The report details the Directors’ remuneration and the basis upon which executive remuneration is determined.
Relations with shareholders
The Group is committed to maintaining constructive relationships with shareholders.
The Group announces its financial results quarterly. The Chief Executive Officer and Chief Financial Officer give presentations on the results each quarter by teleconference for institutional investors and analysts. As the Company has securities listed on the NASDAQ Global Select Market in the US, Shire also files quarterly reports on Form 10-Q and an Annual Report on Form 10-K with the US Securities and Exchange Commission (‘SEC’).
The Chief Executive Officer and the Chief Financial Officer, supported by the other senior executives, also arrange individual and group meetings with major shareholders throughout the year to discuss the Group’s strategy and performance and to understand the views of major shareholders, which are then communicated to the Board as a whole. The Chairman, Vice Chairman and the Senior Independent Non-Executive Director are available also to meet with major shareholders.
Shire’s website at http://www.shire.com/ provides information about the Group and its business and is regularly updated. The Group’s Investor Relations department acts as a contact point for investors throughout the year.
At the Company’s AGM shareholders are given the opportunity to ask questions of the Directors. The Directors also make themselves available informally after the meeting to answer questions from shareholders.
Shire’s approach to Responsibility
Shire strives to ensure it delivers value to healthcare systems and to society. It is therefore critical that Responsibility is at the heart of Shire’s business in order that we continue to build and maintain trust with our many stakeholders (patients, physicians, policy makers, payors, investors, employees and others) as well as in the community and environment in which we operate. Shire therefore attaches great importance to ethical business practices and to societal and environmental issues. Accordingly, ultimate responsibility for them is taken at the highest levels. The Board reviews Shire’s overall approach to Responsibility. The Board also reviews the specific business risks related to Responsibility matters, as part of the overall risk management review process.
During 2010, Shire continued to further advance its Responsibility strategy by focusing on core areas that support Shire’s delivery of its business goals. The Responsibility Co-ordination Team, is chaired by the General Counsel, and comprises senior employees who act as sponsors for responsibility focus areas such as access to medicines, stewardship of partners and suppliers, geographical expansion and public/patient education on ADHD. The Responsibility Co-ordination Team comprises line managers with expertise spanning health and safety, supply chain, R&D, marketing, environment, community and drug safety. The Team meets at least three times a year and is responsible for working with employees across the business to ensure that Responsibility is understood by all employees and is embedded in the way Shire conducts its business and seeks to deliver on its goals. Responsibility risks are managed within the overall framework of risk management, explained below under the heading ‘internal control’.
Further information about Shire’s Responsibility focus areas and regular news about Responsibility-related achievements, can be obtained from the area dedicated to Responsibility on Shire’s website at http://www.shirecr.com/.
Code of Ethics
The Group is committed to the maintenance of high ethical standards. The Group’s Code of Ethics applies to all Directors and employees and is available for review on Shire’s website.
Financial reporting and disclosure, internal control and the role of the auditors
The Board has, through the ACR Committee, established formal and transparent arrangements for financial reporting, external auditing and the review of the internal control environment including compliance issues. The ACR Committee’s terms of reference extend to the Group’s compliance and risk management activities as a whole and not just the financial aspects of internal control.
The ACR Committee has access, as it may require, to the Group’s internal and external auditors throughout the year, in addition to presentations from both on a quarterly basis. Any significant findings or identified risks are closely examined and are reported by the ACR Committee Chairman to the Board with recommendations for action.
All employees can, via an independently managed Global Compliance Helpline, raise any concerns in any of these areas and any other area, anonymously if they wish, to the Chief Compliance and Risk Officer in the strictest confidence without fear of discrimination or reprisal.
1 Financial reporting and disclosure
The Board, with the assistance of the ACR Committee, has ultimate responsibility for the preparation of accounts and for the monitoring of systems of internal control. The Board strives to present a balanced assessment of the Group’s financial position and prospects and it endeavors to present all financial, scientific and other information so as to be comprehensible to investors. The Group publishes quarterly financial reports so that its shareholders can monitor the Group’s financial position regularly.
In addition the Group has established a Disclosure Committee, which is chaired by the Chief Financial Officer. Its membership includes executives and senior managers from the Specialty Pharmaceuticals and HGT businesses and from the legal, finance, compliance and risk functions. Its responsibilities include ensuring that all material information is disclosed to investors in the Group’s periodic financial reports and that such information is recorded, summarized and reported accurately.
Following the enactment of the Sarbanes-Oxley Act 2002 in the United States, the Chief Executive Officer and the Chief Financial Officer are required to complete formal certifications, which confirm, inter alia, that:
- the Annual Report on Form 10-K (the ‘Form 10-K’) in the United States does not contain any material misstatements or omissions;
- financial information reported in the Form 10-K fairly presents the financial condition, results of operations and cash flows of the Group;
- the Chief Executive Officer and the Chief Financial Officer are responsible for determining and maintaining disclosure controls and procedures for the purposes of financial reporting in the United States;
- the Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of those disclosure controls and procedures;
- the Chief Executive Officer and the Chief Financial Officer have indicated in the Form 10-K whether there were any significant changes in the Group’s internal control over financial reporting; and
- based on the evaluation of the Chief Executive Officer and the Chief Financial Officer, all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect adversely the Group’s ability to record, process and report financial information included in the Form 10-K have been disclosed to the Group’s auditors.
The Chief Executive Officer and the Chief Financial Officer have completed these certifications and they have been filed with the SEC in the United States as part of the Group’s Annual Report as at December 31, 2010 on Form 10-K.
2 Risk management, compliance and internal control
The Board, in accordance with the Turnbull Guidance on internal control, recognizes its overall responsibility to maintain sound risk management and internal control systems to safeguard shareholders’ investments and the Group’s assets and to regularly review the effectiveness of such systems. Whilst the Board acknowledges its responsibility for the systems of risk management and internal control, such systems are designed to manage rather than eliminate all risk. Accordingly even the most effective systems of risk management and internal control can provide only reasonable and not absolute assurance against material misstatement or loss.
In 2010, the Board reviewed both the key risks faced by the Group and the effectiveness of the Group’s risk management and internal control systems. Aside from these reviews, the Board delegates responsibility to the ACR Committee for more regular review of both key risks and internal controls and for monitoring the activities of the internal audit function. The ACR Committee has kept these areas under regular review during 2010.
The Group has risk management, compliance and internal audit functions. The Chief Compliance and Risk Officer and the Vice President of Internal Audit report to the Chief Executive Officer and Chief Financial Officer, respectively, but each has direct and regular access to the Chairman of the Group, the Chairman of the ACR Committee and the other members of that Committee. They also both attend and regularly present at ACR Committee meetings.
The Group’s risk management, compliance and internal audit strategy is based on a risk and control framework containing the following key elements:
- an effective control environment;
- an effective process to identify, assess and manage risks;
- effective internal control procedures; and
- effective internal audit.
Effective control environment
The key elements of the Group’s control environment are as follows:
- the Board has overall responsibility to maintain the risk management and internal control systems and has delegated certain responsibilities to the Leadership Team and/or the ACR Committee;
- a framework of Corporate Values and a Code of Ethics which sets appropriate standards of ethical behaviour are operational throughout the Group;
- the internal structure of the organization is well documented with clear reporting lines and clear limits of authority for different matters;
- a range of corporate policies, procedures and training have been implemented;
- the internal audit department, overseen by the Vice President of Internal Audit, carries out regular reviews of internal controls and reports findings to management and the ACR Committee; and
- the ACR Committee considers the major findings of any internal investigations and management’s response to them. The ACR Committee reports annually to the Board on the effectiveness of the Group’s control environment.
Effective identification, assessment and management of risks
Management of business risk is essential for ensuring that the Group creates and preserves shareholder value. Accordingly, the Group has an ongoing process for identifying, evaluating and managing the significant risks that it faces. This process has been in operation throughout the period under review and up to the date of signing the Annual Report and Accounts. Material risks are recorded twice a year on a corporate risk schedule (the ‘Schedule’) which allocates specific mitigation or management responsibility to senior management. During 2010 the Schedule was reviewed by the Leadership Team and the Risk Council, which comprised a cross-functional group of senior executives chaired by the Chief Compliance and Risk Officer. The items on the Schedule considered by the Risk Council to constitute areas of higher risk were also reviewed by the ACR Committee and the full Board.
Effective internal control procedures
The Group has a system of internal control procedures. Compliance with these procedures is monitored through a system of internal review and regular reports prepared by Internal Audit and the Group’s external auditors. Any significant issues arising are reported to the ACR Committee.
Effective internal audit
The internal review of the Group’s control procedures and compliance with such procedures is mostly undertaken through internal audit. The ACR Committee monitors and reviews the internal audit program, considers the findings of internal audit reviews and management’s response to them, and ensures efficient co-ordination between the Group’s internal and external auditors. The Group’s internal audit function, comprising a mixture of internal and out-sourced resource, was operational throughout 2010. The ACR Committee, which is responsible for monitoring the activity of the internal audit function, has reviewed the effectiveness of the internal audit function during 2010.
3 External auditing
The ACR Committee has the primary responsibility for making a recommendation on the appointment, re-appointment and removal of the external auditors as well as for determining the remuneration of and overseeing the work of the external auditors. The ACR Committee assesses at least annually the objectivity and independence of the external auditors taking into account relevant regulatory requirements. The Committee reviews and approves the annual external audit plan each year and ensures it is consistent with the scope of the auditors’ engagement. In order to ensure that the independence and objectivity of the external auditors is maintained, the Committee applies a formal policy for the provision of non-audit services. Such services are categorized as follows:
- services for which the external auditors are explicitly excluded;
- services for which the external auditors can be engaged without prior referral to the ACR Committee; and
- services for which pre-approval of the ACR Committee is required.
The Committee also considers the fees paid to the external auditors and whether the fee levels for non-audit services, individually and in aggregate, relative to the audit fee are appropriate so as not to undermine their independence.
Management’s report on internal control over financial reporting
The Group’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13(a) to 15(f) or 15(d)–15(f) promulgated under the US Securities Exchange Act of 1934.
Because of inherent limitations of internal control over financial reporting, material misstatements due to error may not be prevented or detected on a timely basis. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Group’s management assessed the effectiveness of the Group’s internal control over financial reporting for the purposes of Shire’s Annual Report on Form 10-K as at December 31, 2010, which was filed with the SEC on February 23, 2011. In making this assessment, the Group’s management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (‘COSO’) of the Treadway Commission.
Based on its assessment, management believes that, as of December 31, 2010 the Group’s internal control over financial reporting is effective.
Deloitte LLP, the Group’s external auditors, an independent registered public accounting firm, has issued an audit report on the design and effectiveness of the Group’s internal control over financial reporting for the purpose of the Group’s Annual Report on Form 10-K. The Auditors’ Report appears on page F-3 of the Group’s Form 10-K.
Changes in internal control over financial reporting
During the year ended December 31, 2010 there were no changes in Shire’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Shire’s internal control over financial reporting.
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