Corporate governance statement

The Board is committed to practising good corporate governance as part of its aim to deliver shareholder value. In assessing the appropriate standards of corporate governance the Board takes into account the nature and size of the operation, which comprised at 31 March 2011 seven Directors and over 200 staff operating from two sites in the UK and one office in the US. The Board recognises that it is accountable to shareholders for the Group’s standard of governance and is reporting here on its compliance with the code of best practice set out in the Combined Code on Corporate Governance effective for periods commencing on or after 29 June 2008 (the "Code").

Statement of compliance with the Combined Code

The Group has, in the Directors’ opinion, complied with the provisions set out in Section 1 of the Code throughout the year ended 31 March 2011.

The principles set out in the Code cover four areas: the Board, Directors’ remuneration, accountability and audit and shareholder relations. With the exception of Directors’ remuneration (which is dealt with separately in the Report on remuneration), the following sets out how the Board has applied such principles.

The Board

The Code requires every company to be headed by an effective board, which is collectively responsible for its success. As part of its leadership and control of the Group, the Board has an agreed list of matters that are specifically reserved for its consideration. These include business strategy, financing arrangements, material acquisitions and divestments, approval of the annual budget, major capital expenditure projects, risk management, treasury policies and establishing and monitoring internal controls. At each meeting, the Board reviews strategy and progress of the Group towards its objectives, particularly in respect of research and development projects, and monitors financial progress against budget.

Non-executive Directors (NEDs) are encouraged to meet without the presence of Executive Directors as appropriate. Discussions took place on three occasions during the year and included discussions on each Executive Director’s performance.

Vectura is committed to working towards achieving meaningful shareholdings in the Group for executive directors in order to align their interests to those of the shareholders. The Executive Directors acquired shares in both the years ended 31 March 2010 and 2011.

Division of responsibilities between Chairman and Chief Executive

The Board has shown its commitment to dividing responsibilities for running the Board and for running the Group’s business by appointing Jack Cashman as Non-Executive Chairman; by naming Dr John Brown as Senior Independent Director; by establishing an executive management team (Vectura Executive Committee, the "VEC") under the leadership of Chief Executive Dr Chris Blackwell; and by establishing a procedure whereby the VEC reports formally to the Board at each Board meeting.

Board balance

The Code requires a balance of Executive Directors and NEDs (and in particular independent NEDs) such that no individual or small group of individuals can dominate the Board’s decision-taking. Five of the seven current Board members are NEDs. The NEDs come from diverse business backgrounds and each has specific expertise, materially enhancing the judgement and overall performance of the Board.

Throughout the year ended 31 March 2011 and up to the date of publication of this report, more than half the Board, excluding the Chairman, comprised NEDs determined by the Board to be independent.

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Independence of NEDs

As explained in previous annual reports, in order to assist in securing the recruitment and retention of high-calibre NEDs, in the past the Group has, in addition to fees, remunerated NEDs in the form of options to acquire shares in Vectura.

Whilst the Code discourages the granting of share options to NEDs, it nevertheless acknowledges that such grants may be appropriate in a particular company’s circumstances. The Board is of the view that the historic granting of share options to NEDs when Vectura Group plc was a private company was appropriate. No share options have been granted to NEDs since 2 July 2004, when the Company was admitted to the Alternative Investment Market (AIM).

It was essential for an emerging pharmaceutical company like Vectura to secure the recruitment and retention of NEDs with the appropriate experience and international perspective in the context of the Group’s then stage of development. There are no performance criteria attaching to these options, and there is no intention to award any further options to NEDs.

The Board has determined that all NEDs are independent. The holding of share options by NEDs could be, amongst other things, relevant in determining whether a NED is independent. After detailed consideration, the Board has determined that it does not believe that the holding of share options by its NEDs impacts on their independence in character and judgement. Options granted to NEDs are now exercisable and thus similar to holding the equivalent amount of shares.

Other factors that may reflect on the independence of a NED include any material business relationships with the Group; however, there were no such relationships during the year or prior year.

The Board has established a Remuneration Committee, a Nomination Committee and an Audit Committee, whose make-up complies with the requirements of the Code. The terms of reference of each Committee can be downloaded from the Group’s website. In accordance with the Smith Guidance on Board Committees, no one other than the Committee Chairman and committee members receive automatic invitations to the meetings. The NEDs serve on the three board committees, as described below.

The Board has considered the composition of the committees and concluded that the independence and objectivity of the individual NEDs is not impaired by sitting on these committees.

The Remuneration Committee

The Code requires that the Remuneration Committee consists of at least two independent NEDs. Dr Foden chairs the Remuneration Committee, its other members being Dr Brown, Mr Cashman and Mr Warner from 1 February 2011. The Committee has responsibility for making recommendations to the Board on the Group’s policy on the performance evaluation and remuneration of Directors and for determining, within agreed terms of reference, specific remuneration packages for each of the Directors and members of the Executive Committee, including pension rights, any compensation payments and the implementation of executive incentive schemes. The Committee met formally four times during the financial year ended 31 March 2011 and the Board confirms full attendance by all members during the year. No Director is involved in determining their own remuneration.

The Nomination Committee

The Nomination Committee leads the process for Board appointments and makes recommendations to the Board. The Code recommends that a majority of members of the Nomination Committee are independent NEDs. Dr Brown chairs the Nomination Committee and its other members are Mr Cashman, Dr Foden, Dr Richards and Mr Warner from 1 February 2011. The Nomination Committee meets at least once a year, or more if necessary, and has responsibility for considering the size, structure and composition of the Board, retirements and appointments of additional and replacement Directors and making appropriate recommendations to the Board. The Committee met twice during the financial year ended 31 March 2011 and the Board confirms full attendance by all members at those meetings.

The Audit Committee

The Code recommends that the Board should establish an Audit Committee of at least three independent NEDs, with Mr Warner replacing Dr Brown as the Non-Executive Director with recent and relevant financial experience since his appointment as director on 1 February 2011. The Group complies with these recommendations. Mr Warner has Chaired the Committee since 1 February 2011, the other members being Dr Foden, Dr Brown and Dr Richards.

The Audit Committee met three times during the year ended 31 March 2011. The Board confirms full attendance by all members during the year. The Audit Committee is responsible for making recommendations to the Board on the appointment, reappointment and removal of the external auditors and assesses annually the qualification, expertise, resources, remuneration and independence of the auditors, as well as the effectiveness of the audit process.

Any non-audit services that are to be provided by the external auditors are reviewed in order to safeguard auditor objectivity and independence. The Board confirms that there have been no non-audit services that are considered to have impaired the objectivity and independence of the external auditors.

The Code requires that this Annual Report separately describes the work of the Audit Committee and how it discharges its responsibilities. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Code, and on ensuring that an effective system of internal financial controls is maintained. The ultimate responsibility for reviewing and approving the financial statements in the Interim and Annual Reports remains with the Board. Written terms of reference are modelled on the Code provisions and set out the main roles and responsibilities of the Audit Committee. The Audit Committee reports to the Board, identifying any need for action or improvement on any of these terms of reference and making recommendations as to the steps to be taken. The Board reviews the effectiveness of the Audit Committee annually.

The Audit Committee meets with the external auditors at least twice a year without management present and its Chairman keeps in touch, as required, with the key people involved in the Group’s governance, including the Board Chairman, the Chief Executive, the Chief Financial Officer and the external audit lead partner.

Audit Committee members understand the role of the Audit Committee, its terms of reference and their expected time commitments, and have the necessary overview of the Group’s business, financial dynamics and risk.

The Audit Committee reviews arrangements by which staff of the Group may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters.

The Audit Committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.

The Audit Committee reviews the financial integrity of the Group’s financial statements, including relevant corporate governance statements prior to Board submission.

The Group has a formal whistle-blowing policy, which is available to all staff via the Group’s intranet.

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Timeliness and quality of Board information

The Board has sought to ensure that Directors are properly briefed to help them make an effective contribution at the meetings by establishing procedures for distributing Board agendas and papers in a timely manner in advance of meetings. The Board plans formal meetings on a bi-monthly basis, with additional meetings when circumstances and urgent business dictate. In the financial year under review, six regular meetings of the full Board were held. The Board confirms full attendance by all Directors during the year.

In addition, the Executive Directors ensure regular informal contact is maintained with Non-Executive Directors. The Board makes full use of appropriate technology as a means of updating and informing all its members.

Transparency of Board appointments

There are formal, rigorous and transparent procedures for the appointment of new Directors to the Board. Shortlisted candidates are interviewed by the Chairman of the Board and all other members of the Nomination Committee, and evaluations of all appropriate candidates are circulated to all members of the Nomination Committee for consideration and approval prior to candidate recommendation to the Board.

In accordance with the Nomination Committee’s terms of reference, benefiting from the information provided by external advisers used to facilitate the search for an Audit Committee Chairman, the Nomination Committee reviewed Mr Warner’s candidacy against that of other candidates, including Mr Warner’s ability to devote the appropriate amount of time to the role. The Nomination Committee concluded that Mr Warner fulfilled the key requirements for the role and recommended his appointment to the Board. Mr Warner was also introduced to the Group’s external auditors and a number of the Group’s major shareholders prior to his appointment.

Board performance evaluation

Directors are subject to election by shareholders at the first opportunity after their appointment, and to re-election at intervals of no more than three years thereafter. The Board has a process for evaluation of its own performance and that of its committees and individual Directors, including the Chairman. These evaluations are carried out formally once a year and informally on a regular basis throughout the year. The formal evaluation is through an appraisal process. In line with the practice of previous years, the Company Secretary prepared and circulated a questionnaire for all Board members to answer and comment upon specific questions covering specific topics. These included the responsibilities and the roles of individual directors and the Board as a whole; the conduct of Board meetings and Committees of the Board; the Board’s role in monitoring the performance of the Group and corporate governance practices. A detailed anonymised analysis of the replies to the questionnaire, together with conclusions drawn from such analysis, was prepared by the Company Secretary and considered by the Board.

The performances of Dr Blackwell, Mr Cashman and Ms Hyland who are being proposed for re-election at the Annual General Meeting (AGM), have been so evaluated and it has been determined that they continue to perform effectively and show full commitment to their roles on the Board. An induction programme was carried out in order to ensure that Mr Warner, a Non-Executive Director appointed during the year, is familiar with Vectura’s strategy and procedures. Mr Warner is being proposed for election at the AGM which is the first shareholder meeting since his appointment in February 2011.

All Directors have service agreements with indefinite terms, with 12 months’ notice for Executive Directors and three months’ notice for Non-Executive Directors.

Accountability and audit

The Board is required by the Code to present a balanced and understandable assessment of the Group’s position and prospects. In relation to this requirement reference is made to the Statement of Directors’ responsibilities for preparing financial statements. The independent auditors’ report includes a statement by the auditors about their reporting responsibilities.

Measures to ensure auditors’ independence include:
  • approval of engagements with independent audit firms and fees for audit, audit-related and non-audit services,
  • external auditors conducting the audit part of the financial statements not being permitted to perform certain other services without full consideration being given to alternative suppliers of the services,
  • disclosure of the extent and nature of non-audit services in the notes to the financial statements.

Maintenance of a sound system of internal control

The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The Group’s internal controls are regularly reviewed as part of the risk management process. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The concept of reasonable assurance recognises that the cost of a control procedure should not exceed the expected benefits.

There have been no significant internal control failings or weaknesses throughout the year ended 31 March 2011 and up to the date of publication of this report.

The Group’s organisational structure has clearly established responsibilities and lines of accountability. Employees are required to follow clearly defined internal procedures and policies appropriate to the business and their position within the business.

The Group endeavours to appoint employees with appropriate skills, knowledge and experience for the roles they undertake.

The Board has shown its commitment to formal and transparent arrangements for internal control by, amongst other things, reviewing the Group’s arrangements for its employees to raise concerns, in confidence, about possible wrongdoing (formalised in the grievance procedure and the whistle-blowing policy circulated to all employees).

Documented quality procedures are in place to ensure the maintenance of regulatory compliance. These are subject to periodic review to ensure current standards of quality compliance are maintained. A quality group monitors compliance with Good Laboratory Practice, Good Clinical Practice and Good Manufacturing Practice through the implementation of a compliance programme for in-house and contracted-out activities. The Group has a formal Health and Safety Committee, comprising appropriate members of management and other employees, to be responsible for these issues. The Group has formal procedures to ensure appropriate security of documents and proprietary information. Lean techniques addressing laboratory and office inefficiencies have also been adopted.

The Group regularly reviews its portfolio of insurance policies with its insurance broker to ensure that the policies are appropriate to the Group’s activities, size and exposures.

A comprehensive budgeting system allows managers to submit detailed budgets, which are reviewed and amended by Executive Directors prior to submission to the Board for approval. At the end of each quarter a forecast is prepared in the same level of detail as the budget. Actual results against budget and forecast, highlighting variances, are prepared for managers and the Board.

Risk assessment review

An ongoing process for identifying, evaluating and managing the significant risks that are detailed in the risk factors section of this report is in place. The effectiveness of the Group’s internal control system has been reviewed by the Board during the year. The Audit Committee’s terms of reference include the review of the Group’s internal financial control systems and it recommends to the Board any improvements required. Each year, the Audit Committee considers the need for an internal audit function and has concluded that, given the size of the Group’s operations at this time, it is not necessary. The Board also carries out reviews of the non-financial control systems.

Shareholder relations

The Group reports formally to shareholders four times a year by way of the Interim and Annual Reports and two interim management statements, providing a quarterly communication with shareholders. All periodic reports and accounts are made available to shareholders on the Group’s website, or are mailed to shareholders who have elected to receive hard copies. Separate announcements of all material events are made as necessary by press releases. The Group’s website (www.vectura.com) provides an overview of the business including its strategy, products and objectives. All Group announcements are published on the website without delay together with webcasts of both the Interim and Annual results presentations. The terms of reference of each of the Board’s three Committees and certain corporate governance documents are also published on the Group’s website. These are the main mechanisms by which the Board seeks to present a balanced and understandable assessment of the Group’s position and prospects.

Regular communications are maintained with major institutional shareholders and, in particular, presentations are made when half-year and full-year financial results are announced. Dr Brown, as Senior Independent Director, is contactable by shareholders through a link on the Group’s website. In addition, all NEDs have developed an understanding of the views of shareholders through corporate broker briefings and review of issued analyst notes. The Chairman seeks to meet with major shareholders on a regular basis. Certain Non-Executive Directors meet with major shareholders as required. Private shareholders are encouraged to express their views and concern either in person at the AGM or by e-mail.

Constructive use of the AGM

The Board seeks to use the AGM (together with other forums) to communicate with investors and encourage their participation by arranging business presentations and inviting shareholder questions. The Chairs of the Remuneration, Nomination and Audit Committees are present at the AGM to answer questions through the Chairman of the Board.

Anne Hyland
Company Secretary
22 May 2011

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