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Independent IntelligenceSummer 2013

Contents01 Welcome Richard Wilson, Ernst & Young

02 Rethinking long-term incentives Matthew Fell, CBI and Jessica Norton and Vyji Srikantha, Ernst & Young

06 Improving the effectiveness of corporate reporting Sue Harding, FRC

08 The view from here Jan Babiak, Board of Directors for Walgreens, Bank of Montreal and Royal Mail Group

12 Sharman recommendations consultation Melanie McLaren, FRC

14 Cybersecurity and the Board European Audit Committee Leadership Network

18 What are the secrets of successful Boards? Dr Tracy Long, founder of Boardroom Review

22 Knowledge centre Ernst & Young’s latest thought leadership

24 Sub-FTSE 350 update Andy Glover, Ernst & Young

26 Regulatory snapshot

30 Ernst & Young and the ‘Fair Tax’ debate John Dixon, Ernst & Young

32 Upcoming events12

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Independent Intelligence | 1

Summer 2013

Welcome to the 2013 summer edition of Independent Intelligence, our biannual publication for the independent director community. This edition includes a range of regulatory updates, external interviews, articles from the Financial Reporting Council (FRC) and commentary from The Confederation of British Industry (CBI).

Executive remuneration continues to be an important and challenging issue for UK businesses. In our opening article, Jessica Norton and Vyji Srikantha of Ernst & Young’s Human Capital practice and Matthew Fell, Director for Competitive Markets for the CBI, discuss the impact of remuneration-related regulatory change for UK businesses.

We also hear from Jan Babiak, former Ernst & Young Managing Partner and Board of Directors for Walgreens, Bank of Montreal and Royal Mail Group. Jan talks to us about her Board experience and the benefit of more gender-diverse Boards. Dr Tracy Long, founder of Boardroom Review also shares her valuable insights on the secrets and the key features of an effective and successful Board.

We have two key pieces from the FRC. Sue Harding, Director of the FRC’s Financial Reporting Lab provides an update on the Lab’s initiative to help improve the effectiveness of corporate reporting in the UK. Melanie McLaren, Executive Director, Codes and Standards, FRC also gives an overview of the Sharman recommendations consultation.

With heightened public interest, and the prospect of tax reform together with increased tax authority activity globally, John Dixon, Ernst & Young’s UK & Ireland Head of Tax, takes us through Ernst & Young’s viewpoint on the ‘Fair Tax’ debate and how our clients are responding.

We also have our usual mix of upcoming events, a regulatory snapshot, and an update from Andy Glover, Chairman of the Sub-FTSE 350 Independent Director Programme.

I hope you enjoy this edition. If you would like further details on any of the information contained, please email [email protected].

Regards

Richard Wilson

Chairman, Ernst & Young Independent Director and Audit Committee Chair programmes and Co-Chairman of the Audit Committee Chair Forum

Welcome

FTSE 350 and Sub-FTSE 350 Independent Director (ID) programmes

Today’s independent director must navigate a maze of regulatory and technical challenges, from financial reporting through to fraud.

We understand that the task of keeping up to date with these issues can often be difficult; this is where our ID programmes provide support. Our ID programmes include technical workshops, business discussion events, news, guidance and networking opportunities.

To find out more about our ID programmes please visit www.ey.com/uk/independentdirectors

2 | Independent Intelligence

Rethinking long-term incentives

In this article, Jessica Norton and Vyji Srikantha of Ernst & Young’s Human Capital practice focus on the path ahead for long-term incentives. Matthew Fell, Director for Competitive Markets for the Confederation of British Industry (CBI) provides wider commentary on the impact of the remuneration-related regulatory change for UK businesses.

The case for change

The role executive pay played in the financial crisis continues to be the subject of intense debate. Regulators, academics and the media have all argued that excessive short-term risk-taking combined with an inadequate link between pay, performance and governance created a fundamentally flawed model which culminated in regular ‘rewards for failure’ and contributed to the erosion of company value. Across the world’s developed economies, it was acknowledged that change was necessary.

In the UK, the immediate response to public and shareholder concern has been to widen the scope of regulation. Regulators’ efforts to improve remuneration practices and enhance transparency have resulted in significant changes to the framework of remuneration reporting and the introduction of a binding shareholder vote on future pay policy.

One of the key objectives of these changes is to drive long-term and sustainable value creation. This need for ‘long-termism’ in executive pay structures has also been championed by shareholder advisory bodies and institutional investors and, over the past 12 months, many have enhanced aspects of their voting policy to better support this goal.

More recently, the focus on aligning executive pay with ‘long-termism’ in executive pay structures has led to a wider debate regarding the effectiveness of long-term incentive plans.

Earlier this year, the shareholder research and advisory body, Pensions and Investments Research Consultants (PIRC), announced that it intends to recommend that its members vote against all long-term incentive plans (LTIPs). In PIRC’s own words: “Our conclusion regarding LTIPs is simple: they are not long-term and they do not incentivise. They are also ineffective, due to amendments and manipulation by remuneration committees. We believe that superficial reform, trying to redesign the same flawed model, is not good enough. So we’re taking the radical step of opposing all new LTIPs.”

PIRC’s comments are at odds with the objectives of the regulators and the wider shareholder view for incentives to focus on long-term company performance. However, it highlights the challenge for Boards in deciphering what is ‘best practice’ long-term incentive design in the context of regulatory reform and a plethora of governance guidelines.

Re-thinking long-term incentivesExecutive pay is now a mainstream issue. Seldom does a day pass when the size and structure of executive pay do not make the headlines. With the 2013 Annual General Meeting (AGM) season now under way, many are speculating whether there will be a repeat of the 2012 ‘shareholder spring’.

“ One of the key objectives of these changes is to drive long-term and sustainable value creation.”


continued on page 4

Thinking outside the box or ticking the box?

It is generally accepted that listed company long-term incentive practice over the last 10 years or so has followed a ‘standard’ model in the UK. This standard model comprises nil-cost options subject to relative Total Shareholder Return (TSR) and/or absolute Earnings per Share (EPS) growth performance conditions measured over three years. Conformity with this model has created a ‘tick box’ approach to LTIP design and, historically, any deviation has been approached with caution by management, Boards and shareholder bodies/investment groups.

The recent regulatory reforms and guidance from shareholder bodies such as the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) encourages companies to move away from a one-size-fits-all model and instead calls for a more tailored approach that drives company strategy and fits with industry dynamics. In principle, this message has been welcomed. It is, after all, in the best interests of shareholders for companies to design incentives that are fit for their individual purpose.

However, the question remains as to whether a regulation-led approach allows businesses to operate autonomously in terms of designing executive pay structures. The likely impact of the binding vote and new reporting regime is that Boards will need to focus much of their effort on compliance (as opposed to the more strategic aspects of incentive design) and shareholders will increasingly outsource their voting powers to proxy agencies, which will lead to further reliance on the agencies’ evaluation criteria. This may, ironically, mean that, yet again, remuneration design turns into a ‘tick-box’ exercise. Therefore, the

tension remains as to whether the regulatory reforms truly encourage strategically aligned approaches that are ‘outside the box’.

Challenges for the Board

Where Boards are seeking to adopt more tailored approaches, the two areas of LTIP design that pose the greatest challenge relate to setting the correct performance period and selecting the most appropriate performance measures. A discussion of emerging ideas in the market on these issues follows.

Re-thinking performance periods

The Kay review on UK equity markets and long-term decision making found that short-termism is an underlying problem in UK equity markets, with a principal issue being the misalignment of incentives and the investment chain. Professor Kay and, more recently, the Cox Review called for incentive plan periods to be lengthened beyond the traditional three-year timeframe, to strengthen the link between LTIP outcomes and a company’s ability to generate sustainable value. This has been echoed by shareholder advisory bodies such as the ABI and NAPF and also institutional investors, most of whom have welcomed a move to five-year performance periods.

High-profile FTSE 100 organisations such as Rio Tinto and BHP are examples of companies that have responded to calls to lengthen performance periods and have moved to a five-year approach for their executive LTIPs.

Jessica Norton is a Director in Ernst & Young’s Human Capital team in London. She has over 12 years of experience advising public and private companies on all aspects of executive and employee reward. Jessica is also a qualified chartered tax advisor.

Vyji Srikantha is a Manager in Ernst & Young’s Human Capital team in London. She specialises in executive reward and has experience advising companies in both the UK and Australia. Vyji has a background in communications and law.

“ The tension remains as to whether the regulatory reforms truly encourage strategically aligned approaches that are ‘outside the box’.”


Rethinking long-term incentives

However, whilst extending LTIP performance periods might seem like a straightforward exercise, it must be balanced with wider business considerations such as the company and industry’s economic cycle and the company’s business and strategic growth plans. Further, specific consideration must be given to the impact of longer periods on the target-setting process and participants’ line of sight to those targets. Whether or not the performance period is extended, Boards must be prepared to justify to shareholders why the chosen period is appropriate for the business.

Shareholder alignment — emerging practices

Boards are casting a critical eye over how well long-term incentive arrangements provide genuine alignment with shareholder interests. Two approaches that are emerging as best practice are:

• Post-vesting restrictions such as mandatory holding locks on shares, and

• Minimum shareholding requirements to ensure executives’ shareholdings are increased and/or maintained

Re-thinking performance measures

Evolving LTIP design is perhaps best encapsulated in the selection of performance measures. Listed companies operating in mature markets such as the UK have historically gravitated towards relative TSR and/or absolute EPS growth for LTIP measures. However, the effectiveness of these measures has been questioned in recent times.

The Department of Business, Innovation and Skills’ (BIS) review of executive remuneration practices in September 2011 considered whether measures besides TSR and EPS could be used to meaningfully assess long-term shareholder value creation. Subsequently, over the past 18 months, both shareholder advisory bodies and institutional investors have acknowledged the

need for performance measures to be aligned with business strategy (as opposed to market norms). As a result, there is an increasing receptiveness to measures outside relative TSR and absolute EPS growth, provided these genuinely encourage and reflect shareholder value creation.

The ingrained nature of relative TSR and EPS growth measures in UK LTIPs means that the move away from these measures will be slow. Moreover, selecting the right measure must be balanced against wide-ranging governance and business issues, including the views of shareholders (buy-in is required as to whether the measure meaningfully represents long-term value), the views of participants (to what extent can executives influence that measure) and the inherent costs (changes to accounting costs must be understood). Irrespective of the measure that is ultimately chosen, Boards must be able to justify to key shareholders the commercial rationale for the measures selected.

Alternative performance measures — emerging practices

Business success has historically been measured through strong relative TSR performance and EPS growth. A move away from these measures leads to a colourful debate on other metrics that represent value creation. A variety of approaches is emerging:

• Capital efficiency (e.g., Return on Assets, Return on Equity and Return on Capital Employed) — can provide a good insight into the operating performance of a company, as it encourages executives to consider relationships between revenue, costs and invested capital.

• Economic value added/economic profit — arguably represents shareholder value creation, as this measure takes into account the cash ‘earned’ and the company’s weighted average cost of capital.

Evolution not revolution…

The design of LTIPs will continue to evolve but we believe change will be slow and steady as companies navigate through regulatory change and understand how best to adapt practices to support business strategy.

“ Boards are casting a critical eye over how well long-term incentive arrangements provide genuine alignment with shareholder interests.”

continued from page 3


Reforming remuneration or micromanaging it?The view from business — a CBI perspective

We start from the principle that remuneration must be squarely linked to performance at executive level. High pay is only ever justified by outstanding performance. High rewards for mediocre performance are unacceptable. Failure should never be rewarded.

Business is fully behind steps to improve communication between shareholders and companies and we believe that this is best achieved through increased transparency and shareholder empowerment. Corporate governance is the right framework to address this, but crucially, reforms must respect the roles of shareholders and Boards. Shareholders should approve a company’s overall remuneration policy and then hold Boards to account for the implementation of that policy. If these roles become blurred, shareholders could end up micro-managing pay, which is not what they want to have to do, or are most effective at doing.

Where did we get to last year?

We saw the debate take a clear step forward last year, with the new pay reporting requirements generally going in the right direction. Businesses felt that the broad structure of the proposed regulations should and would help to deliver clarity, comparability and certainty for shareholders. In particular, the CBI saw the division between a policy report and an implementation report as practical and supportive of shareholders in understanding pay policy from beginning to end, enabling them to better fulfil their role in holding companies to account.

Where are we now?

Having made progress last year, the direction of travel in the recently published regulations seems to move us further away from an outcome that works for businesses, Boards and shareholders. In particular, the level of detail now required in the policy report will significantly weaken shareholders’ ability to effectively engage on pay. For example, the requirement to disclose the maximum salary of a new director as a percentage of the highest paid existing director could curtail the flexibility of firms to hire the best person for the job. A wider concern, however, is that this proposal, as part of the policy report, begins to blur the distinction between the role of Boards and shareholders — leading to the kind of shareholder micro-management that the new system must strive to avoid.

Where to next?

As we approach the final steps of the process, it is vital that the reforms ensure shareholders have the information they need to approve pay policies — but it remains up to Boards to implement them. If this distinction can be retained, then the system has a better chance of delivering for shareholders, Boards and business as a whole.

“ It is vital that the reforms ensure shareholders have the information they need to approve pay policies.”

“ Business is fully behind steps to improve communication between shareholders and companies.”

Matthew Fell is Director for Competitive Markets with responsibility for leading the CBI’s work on markets in the public and private sectors. Matthew joined the CBI in July 1999 as senior policy adviser for manufacturing and was appointed Head of Enterprise in August 2002, with responsibility for CBI policymaking on small and medium-sized firms and entrepreneurial issues. Prior to taking up his current role, Matthew was head of Corporate Affairs at the CBI, with specific responsibility for regulatory and parliamentary affairs and helping to co-ordinate the CBI’s broader work programme.

Summer 2013

“ Throughout the debate on executive pay the CBI has recognised the importance of the current reforms.”


Remuneration reporting: This work was undertaken to provide input to the Department of Business, Innovation and Skills (BIS) on specific areas of proposed reporting on remuneration. Participants in the Lab’s two projects developed various suggestions on how to simplify reporting while meeting the objectives of improved reporting. BIS has revised several aspects of the draft regulations to reflect the outcome of the Lab’s work. The Lab’s reports provide analysis of the viewpoints of participating companies and investors, and illustrative disclosures that can be adapted by companies for their own reporting.

Market risk disclosure: This report explores themes of how to make important information on current period developments stand out by separating more static information. It also explored several characteristics of good market risk disclosure noted by investors.

Financial reporting: This work focused on the reporting of debt and cash flows — both topics of heightened interest to investors in the current environment. The reports highlight several areas of enhanced reporting by some companies that more directly meet needs of the

investment community for clear information. It may be possible for companies to adopt several of the suggested practices based on information that is already to hand — perhaps already reported to the Board. For example, some companies have adopted enhanced reporting practices that clearly show how much debt is owed and when it is due (i.e., disclosing the detailed terms of debt instruments and showing, in maturity tables, the annual amounts of principal repayments), are disclosing reconciliations that show what the company manages as net debt and changes in each element of net debt over the period (net debt reconciliations), and are showing, in the cash flow statement, how operating cash flows relate to operating profits (for example, disclosing changes in the separate elements of what the company manages as its working capital).

The Lab’s reports are available on the FRC website.

Improving the effectiveness of corporate reporting

Improving the effectiveness of corporate reporting

The Financial Reporting Lab (the Lab) is the Financial Reporting Council’s market-driven initiative to help improve the effectiveness of reporting in the UK. The Lab, which was launched just over a year ago, provides an environment where investors and listed companies can collaborate to develop pragmatic solutions to today’s reporting needs. The Lab operates:

• As a learning space where companies can test existing reporting with investors to identify approaches to the content and presentation that are considered to be most helpful.

• As a hub to support innovation by gathering and sharing evidence from the investment community to provide feedback to the broader reporting community on the value of new and voluntary reporting approaches. It may also influence future changes in reporting requirements.

So far, the Lab has published six reports focusing on the following areas of reporting in the Annual Report for which the Board has overall responsibility:

• Remuneration reporting: A single figure for remuneration and reporting of pay versus performance.

• Market risk disclosure: Presentation of market risk disclosures.

• Financial reporting: Net debt reconciliations, Debt terms and maturity tables and Operating and investing cash flows.

(See grey box below.)

The Lab’s current focus is on helping to improve Audit Committee reporting. It has initiated a project on the content and style of Audit Committee reports, particularly in light of new aspects of the UK Corporate Governance Code (the Code) and Guidance to Audit Committees (the Guidance) updated in September 2012. The Code and Guidance apply to reporting years beginning on or after 1 October 2012.

The Lab is working with a number of companies that have already taken steps to implement aspects of the new requirements, or that are beginning to work toward this, and would welcome the participation of others interested in this opportunity to influence the direction of Audit Committee reporting.

The Financial Reporting Lab’s project on Audit Committee reports

The six reports published by the Lab thus far focus on several aspects of annual reporting, each of which may have relevance to company directors in fulfilling their responsibilities for the report and accounts. The observations reported are based on input from a range of companies and investors that participated in each project.

Lab project on Audit Committee Reporting

The Code requires the Annual Report to provide (on a comply or explain basis) information describing the work of the Audit Committee, including:

• The significant issues that the committee considered in relation to the financial statements, and how these issues were addressed.

• An explanation of how it has assessed the effectiveness of the external audit process, the approach taken to the appointment or reappointment of the external auditor, and information on the length of tenure of the current audit firm and when a tender was last conducted, and

• If the external auditor provides non-audit services, an explanation of how auditor objectivity and independence is safeguarded.

The specific content and manner of presenting this information is largely left to each Committee’s discretion — to be considered in the context of the company and providing insight that investors and other stakeholders may find relevant. Information provided elsewhere in the report need not be repeated but can be cross-referenced, and the Audit Committee would not be expected to disclose information which would be prejudicial to the interests of the company.

On 12 March 2013, Ernst & Young hosted one of its regular Audit Committee Chairs’ meetings at which several Audit Committee chairs discussed how the Lab’s project represents an opportunity for companies to better understand what it is that the investment community wants to see reported by Audit Committees, and for investors and analysts to voice their views.

Audit Committee Chairs participating in this meeting exchanged views on potential challenges posed by the new disclosure requirements. Some of the themes and observations included:


Summer 2013

• ‘Boiler plate’ reports are not deemed helpful to the users of financial statements. If the company’s circumstances remain relatively constant year on year, or information is provided elsewhere in the Annual Report, there is a potential for Audit Committee reporting to become fairly static and generic.

• Audit Committee reports should be specific to the reporting entity. It was suggested that the report includes the Audit Committee’s specific objectives for the year (not just its terms of reference), with a narrative explaining how they were addressed. It was also suggested that the report includes a list of the significant issues and areas in which the Audit Committee spent its time, and how these issues were resolved, recognising that information in the annual report normally represents an agreed position between management, the Board and the auditors, and significant disagreements are not the everyday norm. Potential commercial confidentiality and market sensitivity of information were also discussed.

• It was also felt that assessing and reporting on some aspects of audit quality could be difficult.

The purpose of the Lab’s project is to help companies and investors work through practical points such as these. For example, it is hoped that ideas on ways to keep reporting fresh and insightful from one year to the next can be generated. The Lab’s project provides an opportunity for companies to work through challenges such as these with input from investors.

It is felt that more company-specific Audit Committee reporting should help to provide some useful ‘hooks’ for selected engagement on matters of interest to investors. Focused reporting on the significant work undertaken by the Audit Committee is expected to provide a better understanding of the role of the committee and is a further opportunity for companies to highlight issues that are truly of significance. Generally, it is expected that implementing the new requirements will be a matter of disclosing more on activities already undertaken (versus undertaking more activities), and will help build mutual understanding between Audit Committees and investors to support constructive relationships and engagement.

Have your say in shaping Audit Committee reporting or corporate reporting more generally

Company directors interested in discussing the Lab’s project on Audit Committee reporting or other potential projects for the Lab should contact the Lab by email at [email protected] or contact Sue Harding by telephone on 020 7492 2442 or by email at [email protected]

Further information on the Lab and its activities can be found on the FRC website.

Sue Harding is the Director of the FRC’s Financial Reporting Lab and an independent company reporting analyst. She is chair of the International Accounting Standards Board’s Capital Markets Advisory Committee, a member of the European Financial Reporting Advisory Group’s User Panel, and a participant in the Corporate Reporting Users Forum. Sue qualified as a US Certified Public Accountant and has significant experience as a credit and equity analyst.

“ Audit Committee reports should be specific to the reporting entity.”

The view from here


The view from hereHow do you choose and win Board roles? Why does greater gender diversity on Boards bring companies rich returns — and how do you achieve it? Jan Babiak talks to Independent Intelligence about her Board experience.


Summer 2013

“ There’s no shortage of good qualified women, there’s often a shortage of intent to go find them.”

How did you choose your portfolio?

Working for a Big Four firm you may attend many Board meetings but you’re not allowed to sit on public Boards, so I started by interviewing about 40 people who I knew served on Boards.

The wise advice I got was to think carefully about what you want and set clear criteria up front. The temptation is to fill a blank schedule. But offers may come quickly if you have a good pedigree, so if you haven’t been selective, you’ll be too committed when something you really want comes up. Many noted that getting your first role can be harder without a lucky break, so if your first offer meets some of your criteria, you should seriously consider taking it. Once you have experience you can be more selective. I was lucky as my first opportunity met all my criteria.

So what were your criteria?

I set four. First was to find Boards where I could really contribute, not just be ticking someone’s boxes. I wanted to know I would make a difference.

Second, I wanted organisations that were truly international; to use the experience I got in the last 20 years of my career with Ernst & Young.

I also targeted roles seeking technology expertise as I had invested so much of my career in leading technology practices. ‘Doing no harm’ was also important — having worked extensively on sustainability issues, I turned down roles at companies whose operations were hard on the environment yet were not working hard toward remediation of the damage or those that didn’t chime with my personal ethics.

My final criterion is ‘no jerks’! I may not be everyone’s cup of tea but I wanted to join people I was happy to work with all the time and vice versa. A group committed to a common goal, while understanding we each have an obligation to dissent but to disagree without being disagreeable. So the people on the Boards were a critical part of my choices, and I did due diligence on everyone from the chairman to the audit partner.

How did you prepare for Board roles?

By planning well ahead. In my late thirties I started thinking about taking on public Board roles in my future. That directed many of my choices for a decade. I chose P&L-heavy roles to help get the right business understanding, attended relevant events, read up on Boards. I didn’t want to retire and then start thinking about what’s next.

Preparing includes understanding what Boards are looking for and positioning your experience to match their needs. I often see chronological resumes, focused heavily on people’s latest experience rather than highlighting what’s useful from a Board standpoint across their career — such as leading through bust as well as boom, strategy

and execution, expanding and contracting businesses, union experience, handling regulation and more.

Finally, you need to get out and let people know you’re looking — as a colleague used to say: ‘man sits at desk a long time before roast chicken flies into mouth’.

What do you enjoy most about working on Boards?

Everyone in the room has the same agenda — representing shareholders and doing the best for the company. It’s not about the next promotion or defending your business unit. This collaborative working, where you bring together different views and experience to reach a common goal, is the very best part of Board work for me. Surprisingly, none of the 40 people I consulted mentioned this aspect.

Do differences in governance affect how you work?

The UK governance model is very strong. With rotation you have a maximum of ten years but some directors can be on US Boards for 25-plus years. But the business principles are the same and experience in an area like technology translates well across industries — it’s just learning and being aware of the differences in culture, governance, reporting and regulation. You’re often able to apply the best guidance from the different environments across a Board portfolio, too.

What are the most important qualities and experience for Board members?

It is important to start with a strong base of experience that will allow you to contribute to all or at least most of the Board’s agenda. Then, it’s specific to the company and position they’re looking to fill. On the Logica Board we had broad business leadership experience but we had different nationalities, a large age range and lots of different backgrounds, all with something specific to contribute. It was the mix that made it sweet.

Sometimes you need someone with a strong background in the industry. For others you want knowledge of the needs of customers or suppliers who know little about your business, but know exactly what they want it to do for them.

continued on page 10


The view from here

1 Harvard Business Review — What Makes a Team Smarter? More Women by Anita Woolley and Thomas Malone

2 Thought leadership from Credit Suisse Research and the world’s foremost experts

3 www.huffingtonpost.ca/2013/03/25/female-board-directors-decision-making-study_n_2951084.html

4 Sheryl Sandberg is Chief Operating Officer of Facebook — her book is called Lean In: Women, Work and the Will to Lead, published in the UK in March 2013

5 www.womencorporatedirectors.com

Sometimes Boards seek experience in a game-changing trend like social media. That doesn’t usually mean a 20-year-old who may lack the broader business experience. While social media expertise can come from different industries, it is built on historic, complex infrastructures that must be understood as well. What you need are not one-trick ponies, but people who’ve led teams where implementing social media is a critical part of business success.

So often, people think they will be a great Board member because they have a specific skill that is needed by a Board. For example, if you’ve been an audit partner you can probably contribute to, or chair, an Audit Committee but you will be a better Board member if you’ve also had a CFO secondment or run a P&L or business line. HR, compensation and talent management is another important skill set but the same applies. Technology often can make or break your business and if no one on the Board has strong experience in this you probably have a void.

A skills grid of Board members can make the blind spots clear. But you can always pull in specialist experts on any subject — what matters is the ability to see the wider picture and contribute to the whole conversation.

What are the advantages of more gender-diverse Boards?

Difference helps deter groupthink. Studies from Catalyst, Harvard1 and Credit Suisse2 give hard evidence that like-for-like companies with the highest percentage of women Board members deliver better results on key financial factors such as profit and ROE than those with no women on the Board. This is not new information but the reasons are important to understand. The International Journal of Business Governance and Ethics recently published a survey that showed that female Board members were more likely to use ‘co-operation, collaboration and consensus building’ to address complex decisions, while men are more likely to base their decisions on rules and regulations, with a high level of recognition of the hierarchy of others in the room and a discomfort when people come in with different values or views than the leader. As such, to avoid the perils of groupthink, the researchers concluded that Boards and shareholders all benefit when there are more female directors.3

How can Boards achieve greater diversity?

I agree with Sheryl Sandberg4 — we need women in leadership positions to educate people about the benefits and point out the gaps. Knowing the evidence will encourage more men to be part of the solution and to query all-male shortlists for senior roles. Women in the boardroom or the C-suite hate to be the ones to have to do it every time — men should show leadership here as well.

Once you get women on shortlists, they compete well. There’s no shortage of good qualified women, there’s often a shortage of intent to go find them.

Do quotas help?

Most women loathe the very idea of getting picked on gender but they shouldn’t worry — you only get picked if you’re at least as qualified as the other candidates, so the real issue is not about quotas but rather how we ensure that qualified women are identified and considered.

I think an approach like the UK’s “comply or explain” model is much better than quotas. To avoid platitudes, it does need a reference to a market-wide minimum percentage guideline to be effective, however. We can help those who claim a “lack of female executive talent”, as this is not a valid argument any more. Women Corporate Directors5 has nearly 2,000 global women members already on Boards, most of them interested in additional Boards, and the Global Board-Ready Women database has that many again. If someone tells me they can’t find good female candidates, a long list of relevant, Board-experienced (or at least Board-ready) and qualified women will pop up in their inbox.

Top tips for getting Board roles

• Understand exactly what Boards do and the governance code.

• Assess how all your skills and experience fit this.

• Get the experience to fill the gaps if necessary.

• Set clear criteria for what will be important to you — and pick colleagues who can disagree without being disagreeable.

• Position what you have so it’s clear how your whole experience contributes to the Board and various committees.

• Let people know you are looking for Board roles and exactly what you can contribute.

Jan Babiak currently serves on the Boards of Walgreens, The Royal Mail Group, Bank of Montreal and the Council of the ICAEW (Institute of Chartered Accountants in England and Wales). She was a Board member at Logica until its sale in 2012. Before ‘going portfolio’, Jan spent almost 30 years with Ernst & Young where, as managing partner, she led practices focusing on technology and risk, sustainability, and regulatory policy, serving clients across the globe.


At Ernst & Young, we believe your internal audit can help identify areas of improvement, so you get to enjoy a better performance. Find out how our Advisory teams can work with you to make more of your internal audit at ey.com/advisory.

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Sharman recommendations consultation

In the aftermath of the financial crisis, the Sharman Panel, which reported in June 2012, highlighted the importance of the identification, analysis and management of going concern and liquidity risks and made a number of recommendations to improve the robustness and reporting by directors of their going concern assessment.

The central tenet of the Panel’s report was that the recommendations should improve the Board’s management of going concern and liquidity risks. By considering these risks as an integral part of business planning and strategy, Boards would be better placed to respond earlier to future financial or economic distress. Investors, creditors and other shareholders would be better informed, to understand how a Board identifies and manages risks that could threaten a company’s survival.

The Guidance applies to all companies and their Boards in respect of their Companies Act reporting responsibilities. The FRC has been keen to find out from stakeholders whether it will be clear to non-listed companies which aspects of the Guidance are or are not relevant to them. The FRC also plans to address whether smaller companies will be able to meet the effective date (applicable for years ending on or after 1 October 2012). The Guidance will apply for the first time to annual reports, not interims.

Some of the key issues for going concern in the consultation included: when a company should be judged to be a going concern; over what period Boards should assess going concern matters; the implications for SMEs; and the issue of central bank support for banks.

The Guidance judges a company to be a going concern (without disclosing qualifications or assumptions) if, for the foreseeable future, the Board has a high level of confidence that the company will have the necessary liquid resources to meet its debts as they fall due and will be able to sustain its business model, strategy and operations, and remain solvent. If not, the company should provide narrative qualifications or assumptions to its statement that the company is a going concern. The FRC is keen to understand from stakeholders whether this disclosure will be informative and appropriate.

The term ‘foreseeable future’ in assessing when a company should be judged a going concern includes whatever a Board knows or should be reasonably expected to know about the future — including having regard to its assessment of the likely evolution of its own company’s business cycles and the wider economic cycle. Therefore, the ‘foreseeable future’ is not a fixed period, although directors are also required to have regard to a period of at least one year from the date of approval of the financial statements. The FRC aims to establish from consultation responses whether the Guidance appropriately clarifies the meaning of the ‘foreseeable future’ for company Boards, and whether the concept is capable of being applied in practice by Boards.

Sharman recommendations consultationThe Financial Reporting Council’s (FRC) consultation, Implementing the Recommendations of the Sharman Panel, ended on 28 April 2013 and responses will play an important role in refining and finalising the proposed new Guidance on Going Concern for directors. This article considers the key issues within the consultation document, the principal challenges for company Boards, areas where the FRC would welcome feedback and how SMEs might address the proposed guidance.

and to have a realistic path to relinquishing reliance on that support. The FRC would like to understand whether this is considered to be a practical and acceptable approach.

The consultation is an important part of the FRC’s mission to promote high quality corporate governance and reporting in the UK, to foster investment. Enhanced assessment and reporting of going concern is an important step on that journey.

Once the Guidance is issued, the FRC will also consult on draft revised guidance on risk management and internal control, with the aim of publishing updated guidance in the autumn. This ‘Turnbull’ guidance was last updated in 2005, and doesn’t currently cover the Board’s responsibility for determining the nature and extent of the risks it is willing to take — which was added to the UK Corporate Governance Code in 2010 — or the other responsibilities identified in the FRC’s 2011 publication, Boards and Risk. It will be updated to reflect these changes and responsibilities.

This article was written in March 2013.


While the assessment of going concern is ostensibly the same for all companies, it is important that directors consider carefully what is appropriate in the particular circumstances of their company, especially for small and medium sized enterprises (SMEs). The FRC is aware that most SMEs will not have an audit or risk committee in their governance structure, leaving responsibility for evaluating and reporting on going concern to the Board itself. However, we have noted that the identification and monitoring of risks is nonetheless important for these companies.

For this reason, the consultation document included considerations for SMEs and recognised that less-complex companies may have less-complex business planning and risk-management needs. The FRC will be interested to hear from SME Boards about how readily the proposed Guidance can be applied proportionately by them and how this would affect their year-end reporting, before it takes a decision on its application for SMEs.

The Banking Supplement to the Guidance confirms that central bank liquidity support for a solvent and viable bank does not necessarily require disclosure, provided that the support is in the normal course of business for the bank and that it is judged to be solvent and viable

Melanie is an experienced business leader with strong financial and professional services background and in-depth expertise in risk, regulation and assurance. An experienced chartered accountant, between 1999 and 2009 Melanie was a partner at PricewaterhouseCoopers within their Financial Services Assurance Practice. In May 2010 Melanie joined Friends Provident as interim Chief Risk Officer, before becoming Business Risk Director in September of that year. Between August 2011 and June 2012, Melanie was interim Chief Risk Officer of the enlarged Friends Life Group.

Melanie qualified as a chartered accountant in 1990 and read Arabic Studies and German at St Andrew’s University. Melanie is a member of the Institute of Chartered Accountants in England & Wales.

Summer 2013

Melanie McLaren Executive Director, Codes and Standards


Boards should focus more on cybersecurity

EACLN members and Mr Hughes agreed that Boards must be more engaged on cybersecurity. A member noted, “As Board members, we must acknowledge the problem and then ask IT what they are doing about it. Too many Board members think that there isn’t a problem or that it is someone else’s problem”.

Indeed, a recent report published by Carnegie Mellon CyLab, a cybersecurity research and education center, found serious shortcomings in Board oversight of cybersecurity.1

The report was based on a survey of over 100 Board directors and senior executives at Forbes Global 2000 companies. Comparing the results of the 2012 survey with similar surveys conducted in 2008 and 2010, the report states:

For the third time, the survey revealed that Boards are not actively addressing cyber risk management … There is still a gap in understanding the linkage between information technology (IT) risks and enterprise risk management … Boards still are not undertaking key oversight activities related to cyber risks, such as reviewing budgets, security program assessments, and top-level policies; assigning roles and responsibilities for privacy and security; and receiving regular reports on breaches and IT risks.2

Among European companies, the percentage that reported rarely or never reviewing key elements of company security programs was 44% for annual budgets, 53% for roles and responsibilities and 38% for top-level policies.3

Cybersecurity and the Board


On 30 November 2012, members of the European Audit Committee Leadership Network (EACLN) met in Madrid for their 18th stand-alone meeting. In one session, Mark Hughes, managing director at BT Security, joined members for a discussion of cybersecurity risks and how Boards and companies can respond.

1 Jody R. Westby, Governance of Enterprise Security: CyLab 2012 Report (Pittsburgh: Carnegie Mellon University, 2012).

2 Ibid., page 5.

3 Ibid., page 17.


Summer 2013

4 Ibid., page 19.

5 Ibid.

6 Ibid.

Delegating responsibility for cybersecurity oversight

The CyLab report noted shifts in cybersecurity oversight, including the delegation of responsibility to different committees of the Board. The report and pre-meeting conversations with EACLN members identified several approaches to delegating responsibility:

• The Audit Committee is responsible for cyber risks. CyLab found that at 41% of the European companies responding to the survey, the Audit Committee still has the most responsibility for cyber risks.4 Many EACLN members also noted that cybersecurity is chiefly addressed by the Audit Committee as part of the committee’s oversight of risk management in general.

• A risk committee oversees privacy and security. The CyLab survey detected a sharp increase from earlier surveys in the percentage of companies that are assigning cybersecurity oversight chiefly to risk committees. At 22% of the European companies participating in the survey, the risk committee has the most responsibility for cyber risks. The percentage is about the same in North America, but substantially higher in Asia (38%).5

• The full Board is responsible. According to the CyLab survey, 34% of European companies give the full Board the most responsibility for cyber risk. Again, the percentage was very similar in North America and substantially higher in Asia (48%).6

In pre-meeting conversations, members mentioned that the frequency and regularity with which Boards address cybersecurity varies from company to company:

• Regular reviews. A few members reported that their Board addresses cybersecurity on a regular basis. One member reported, “The Audit Committee reviews what the company is doing [regarding cybersecurity] at every meeting. It would never be off the agenda”.

• Ad hoc discussions. Other members reported that cybersecurity comes up more occasionally as part of a broader discussion of risk. One member said, “One meeting is dedicated to risk, and this is one type of risk. Half-yearly, we go through the 10 risks that are most challenging, and IT security is there now and then”.

Drilling down on issues

The complexity of cybersecurity and the pace of technological change make effective oversight a challenge for Boards. Mr Hughes and the members identified several approaches that can help ensure effective coverage of cybersecurity risks and facilitate the Board’s work in this area:

• Leverage the company’s risk-management machinery. Mr Hughes reminded members that the existing ERM system should incorporate cybersecurity risks. Like management, the Board should treat cybersecurity risks as any other risk, using the ERM system to identify and assess these risks. Then, it should evaluate the appropriate mitigation in the context of other risks. Mr Hughes remarked that the process should be ongoing: “Rerun the risk assessment process when you look at a new market, a new product or a product change”.

• Bring in internal audit. Internal audit can provide additional information about company systems and processes. A member said, “The internal audit director and his expert on cybersecurity will report to the Audit Committee. They will cover all the scenarios they look at — general systems, controls of different units in different countries, methods of reporting, methods of auditing”.

• Bring in outside experts. As with other complex risks, members suggested that Boards should seek support from experts outside the company, who can provide supplemental information and fresh perspectives. One member said, “Developments are so quick that it is impossible to keep staff informed of developments, so bring in experts. We get an annual presentation on cybersecurity developments and threats.” Another member said, “It’s like any other risk you are not comfortable with — you go and get some external help from the external auditor, fraud experts and/or technical experts”.


“ … the survey revealed that Boards are not actively addressing cyber risk management … There is still a gap in understanding the linkage between information technology (IT) risks and enterprise risk management …”



Questions the Board should ask about cybersecurity

Mr Hughes listed a number of questions that Audit Committee chairs (or other Board members tasked with cybersecurity oversight) should ask management:

• How much would a cybersecurity breach impact the organisation, and can management demonstrate the rationale behind that assessment?

• Where and what are the most critical assets? How does management determine which assets are critical?

• What are the most critical applications? How does management determine which applications are critical?

• What monitoring is in place, and what level of continuous detection? What anomalies has management found?

• Who is management working with in the industry and government? What is being shared, and how?

• What is management doing with third parties who have access to the network, and what level of control does management have over them?

• Who are the privileged users with high-level access, and how are they being managed?

• How is software patch management being handled?

• What has management done to protect the company against denial-of-service attacks?

Cybersecurity disclosures

When and how to report cyberattacks is an evolving issue that could become an important topic of discussion for Boards and especially Audit Committees. Companies are required to disclose when personal data have been compromised. They may also have obligations to investors regarding other types of data losses or cyberattacks that have material effects.

Regulators have started addressing the issue of disclosure to investors. In October of 2011, the Division of Corporation Finance at the US Securities and Exchange Commission issued guidance on disclosure of both cybersecurity risks and actual incidents. The guidance notes that “although no existing disclosure requirement explicitly refers to cybersecurity risks and cyber incidents, a number of disclosure requirements

may impose an obligation on registrants to disclose such risks and incidents”.7 The guidance goes on to discuss potential obligations stemming from requirements in areas such as risk factors, management’s discussion and analysis and legal proceedings, among others.

Quantifying the impact of these disclosures presents problems. Whereas, valuing the impact of privacy breaches is now fairly routine, it can be very difficult to quantify the loss of intellectual property. As Dmitri Alperovitch of the cybersecurity company, CrowdStrike, explained in an interview with the Council on Foreign Relations, “The challenge is that, quite frankly, a lot of this has been painless thus far because when someone goes into your company and steals your intellectual property, it’s not like they stole your car — you still have your intellectual property. Until someone does something with it that damages you, you haven’t experienced that loss in many ways. That’s why a lot of these companies have been hesitant to come forward”.8 Because companies are hesitant to disclose attacks, it is likely the magnitude of the problem is severely underestimated.

Members of the Audit Committee Leadership Network (ACLN) in North America have recently mentioned some of the dilemmas around disclosure.9 One member said, “The issue is how much you disclose — it could damage your reputation, but the faster you come clean, the more credibility you have with clients.” The same member noted that “if we decide a breach requires disclosure, we evaluate with counsel what exactly to disclose — we don’t want to provide a roadmap for other attacks”. Other ACLN members mentioned bringing in outside law firms and consultants to help deal with the issue.

The perspectives presented are the sole responsibility of Tapestry Networks and do not necessarily reflect the views of network members or participants, their affiliated organisations, or Ernst & Young. Ernst & Young refers to all members of the global Ernst & Young organisation, each of which is a separate legal entity. This material is prepared and copyrighted by Tapestry Networks with all rights reserved. It may be reproduced and redistributed, but only in its entirety, including all copyright and trademark legends. Tapestry Networks and the associated logos are trademarks of Tapestry Networks, Inc. and Ernst & Young and the associated logos are trademarks of EYGN Ltd.

7 US Securities and Exchange Commission, “CF Disclosure Guidance: Topic No. 2: Cybersecurity”, 13 October 2011.

8 “Cybertheft and the US Economy”, an Interview with Dmitri Alperovitch, by Jonathan Masters, August 11, 2011.

9 Audit Committee Leadership Network, “Cybersecurity and the Board”, page 8.



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What are the secrets of successful Boards?

How well do Boards understand the real strengths and weaknesses of the business, as well as opportunities and threats in the wider market?The nature and complexity of any company makes a difference to boardroom understanding. Some companies have very simple and visible operations — others may demand more specialist knowledge, like financial services and pharmaceuticals. But even in complex businesses, diversity of perspective is a key factor: a diverse Board with directors who take (and are encouraged to take) a strategic view will get a better picture than a Board packed with people from the same background.

Another important factor is the quality and timing of management information; directors need to understand the cycle of reporting to the executive team and to the Board. For example, decentralised companies may have less visibility of divisional information at the

centre. The landscape also changes at very different speeds; technology companies may face challenges with rapid market innovation and limited publicly available information on privately owned competitors.

Sometimes a company genuinely thinks ‘there’s no one like us!’ This is never exactly true — peers and competitors always have strengths and weaknesses that could impact the business or that directors could learn from.

Although directors now generally have a much greater knowledge and understanding of the business, keeping a clear view of the competitive landscape, and what customers want, is a common challenge for Boards.

How good are inductions for directors?Directors now expect, and are willing to commit, days or weeks to induction programmes, not only in regulated industries; good company secretaries plan and structure very thorough inductions, particularly in large, complex organisations.


Dr Tracy Long has evaluated the effectiveness of almost 100 Boards since 2004. Independent Intelligence gets her insights on what makes a Board work well.


Summer 2013

But many Boards only address this at the beginning — it’s better to plan for ‘continued induction’, so that directors can keep in touch with any changes in the business over a nine-year period.

Structured training and Board updates are part of a continuous programme — there’s a lot on offer externally for Audit Committees, but much less at the moment to support remuneration and nomination committees.

The structure of Board agendas, and the location of the meetings, can also help keep directors’ knowledge current. For example, holding meetings at the company’s operating sites can give directors the opportunity to meet more executives and see the business in action. It also sends a great message throughout the company. Fewer meetings, but in different contexts, can be much more productive than 12 morning meetings a year; a Board that travels together creates new opportunities to stimulate deeper and different discussions among its directors.

Facing greater challenges in the market, how effectively do Boards focus on risk and control?Most Boards are spending much more time on this; Audit Committees tend to be well chaired, and are populated by knowledgeable people who have clear roles and good training. The Audit Committee chair usually invests a great deal of time in making sure that all the relationships work well.

How key invididuals on the Board and in the committees work together is critical for an effective focus on risk and control. Will the CFO really stand up for what he or she believes in — and take on the CEO if there is a disagreement? How well does the CFO work with the Audit Committee, or the Audit Committee chair with the internal auditor?

What are the merits of separate Risk and Audit Committees?Clearly it depends on the company and sector. In financial services, risk is so complex you need to dedicate a separate and knowledgeable group. But risks escalate to the Board from all the other committees too and the Board must get good oversight of all these to avoid a fragmented picture.

Smaller Boards can facilitate efficient knowledge sharing by appointing all non-executives to every committee, so that they can participate in everything. With smaller Boards it’s also easier to have an ‘open door’ policy for the committees, so that non-executive directors can attend even if they are not members. This will give them a much clearer picture of risk than they will get from just reviewing the outcomes on paper.

Most companies now have a risk register, but this should be firmly viewed as just a starting point. Often they’re not updated enough, or used as a living management tool by executives, so are of little use to the Board.

Some of the best risk conversations are not about the mitigation of specific risks, but are an exploration of how the Board and company would react if something goes wrong. When we think about recent corporate disasters, the risks involved may have featured on the register but in reality played out in totally unexpected ways. ‘What if’ scenario planning can be hugely valuable.

How do Board size and mix contribute to effectiveness?I’ve reviewed Boards that range from five to 25 members — there is no perfect template. Boards are getting smaller and no more than 10-12 works best. Many Boards appoint only the CEO and CFO as executive members. This can increase the number of non-executive appointments but can also funnel the view, particularly

Seven practices of effective BoardsPromote diversity — for enhanced debate and decision-making.Sustain inductions — keep directors fresh throughout their tenure.Encourage constructive dissent — so individual members can challenge effectively.Think ‘what if?’ — scenario planning can be more effective than a risk register.Consider size and style — 10-12 allows a good balance of execs and non execs, but experience, style and personality are key.Reward openness and transparency — mutual trust and respect between execs and non execs is the bedrock of Board success.Avoid complacency — life constantly changes. Good Boards know that being effective cannot be taken for granted.




as the CEO is usually a strong personality. These Boards need to plan carefully how and when to bring in other executives, so that non-executives can hear another perspective, and learn more about executive succession planning. For many Board and non-Board executives, it can be difficult to make a rounded contribution — they are often asked to give presentations, and answer questions as a specialist, rather than participate in a more general debate.

Boards are now much more aware about achieving the best level and mix of skills and knowledge. But composition needs careful thought, whether it’s about background, style, expertise or gender.

For example, ‘technology experience’ is on a lot of wish lists — this can be a challenge for nomination committees, firstly to define this need more precisely, then to find someone who can combine specialist knowledge with the vision and ability to contribute more broadly.

On remuneration committees, the subtle skills required to deal with personal issues, resolve conflicts, and communicate internally with executives, and externally with shareholders and the media, can be hard to find.

Personality and style are hugely important. For example, some people say little in meetings but what they do say is hugely valuable; they may also be making their contribution outside of the main meeting. You need to assess the loudest and the quietest voices carefully, as first impressions can mislead.

What are the key features of an effective Board?Absolute number one is a culture of openness and transparency, which tends to come from mutual trust and respect between executive and non-executive directors, a confidence that non-executives can add to executive judgement, and a belief that everyone is working together to contribute to the long-term health and success of the company.

A litmus test for this is how early executives alert the Board to problems. Do they bring problems for discussion or simply present solutions? Executives who respect non-executives and trust they will offer constructive advice are more likely to tell the Board that they are worried about something, or that something’s not going according to plan.

Openness also encourages constructive challenge; it often helps to have at least two gritty voices — people will often stop listening to one lone dissenter, but two people asking left-field questions will shift the debate.

Obviously the chair and CEO exert powerful influence on the Board’s effectiveness. A good chair will stimulate and conduct dissenting voices as well as steer the discussion, summarise consensus, and ensure action is taken. Chairs often make sure that they have much better knowledge of the company in today’s world: their reputations are on the line, and they choose their roles with care, and invest far more time.

Finally, it’s important to avoid complacency about being effective. Life constantly changes, and Boards are never infallible.

Dr Tracy Long is the founder of Boardroom Review1, a leader in evaluating and advising on the effectiveness of Boards and committees. Dr Long is currently on the Board of the Department of Culture, Media and Sport, where she chairs the Audit and Risk Committee and is a member of the Remuneration Committee. She is an advisory director of Carnegie Hall. Previously she has served on the Boards of leading investment, media and arts organisations.


1 www.boardroomreview.com

UK Bribery Digest: January 2013

The UK Bribery Digest examines completed UK bribery and corruption cases and comments on cases in the second half of 2012.

For more information, please visit: ey.com/GL/en/Services/Assurance

Q1 2013 UK profit warnings report

The latest report reveals that quoted companies issued 72 profit warnings in Q1. Numbers should fall if expectations stay in balance and the global economy holds.

To download a copy, please visit: ey.com/UK

Exceptional magazine

In this edition of Exceptional, our interviews with leading entrepreneurs of fast-growth companies show that, despite these turbulent times, a combination of entrepreneurship and innovation is still a successful formula for growth.

To download this edition, please visit: ey.com/UK

2013 EMEIA Fraud Survey

Our survey asked over 3,000 Board members, executives, managers and their teams across 36 countries about the nature of this pressure. The results make for uncomfortable reading.

To download a copy, please visit: ey.com/GL/en/Services/Assurance

Changes to communication and reporting for companies and auditors — what do companies and auditors need to start thinking about?

This publication provides some practical guidance and considerations to help companies consider the requirements of the revised UK Corporate Governance Code for:• Boards to confirm that the annual report and accounts is “fair, balanced and understandable”.• Audit committees to provide information to shareholders (within a separate section of the annual

report and accounts) on the significant matters considered in relation to the financial statements and how they were addressed.

To download a copy, please visit: ey.com/UK/en/Issues/Governance-and-reporting/Corporate-governance

Knowledge centre

Knowledge centreSharing the latest thought leadership from Ernst & Young

Assessing the performance of the audit committee — a checklist

The checklist has been produced to help audit committees review their current activities against the Guidance and identify practices which could be improved. Company Boards may also find this checklist useful as part of their review of the effectiveness of their audit committee.

Download a copy at: ey.com/UK/en/Issues/Issues-and-Perspectives---NEDI

Tax transparency report

The trust an organisation builds with its stakeholders is critical. As a measure of an organisation’s contribution to the economies it operates in, tax is a key dimension in building that trust.

To download a copy, please visit: ey.com/UK/en/Services/Tax/Tax-Transparency-Report


UK Bribery Digest: January 2013

The UK Bribery Digest examines completed UK bribery and corruption cases and comments on cases in the second half of 2012.

For more information, please visit: ey.com/GL/en/Services/Assurance

Q1 2013 UK profit warnings report

The latest report reveals that quoted companies issued 72 profit warnings in Q1. Numbers should fall if expectations stay in balance and the global economy holds.

To download a copy, please visit: ey.com/UK

Exceptional magazine

In this edition of Exceptional, our interviews with leading entrepreneurs of fast-growth companies show that, despite these turbulent times, a combination of entrepreneurship and innovation is still a successful formula for growth.

To download this edition, please visit: ey.com/UK

2013 EMEIA Fraud Survey

Our survey asked over 3,000 Board members, executives, managers and their teams across 36 countries about the nature of this pressure. The results make for uncomfortable reading.


Rapid-growth markets

The world’s rapid-growth markets will drive a resurgence in global growth. The latest edition of our forecast offers insights.

To read more, please visit: emergingmarkets.ey.com

ITEM Club UK spring forecast

Ernst & Young is the sole sponsor of the ITEM Club, which is one of the UK’s best-known independent economic forecasting groups.

To learn more about the ITEM Club and to read the spring forecast, please visit: ey.com/UK

Eurozone forecast: Spring 2013

The risk of an imminent Eurozone break-up has reduced and economic growth is likely to resume from mid-2013, according to our latest forecast.

To learn more, please visit: ey.com/GL/en/Issues/Business-environment/eurozone

Business Pulse

Globalisation and the lingering effects of the financial crisis have intensified the competitive landscape. How can you mitigate risks and maximise opportunities in 2013 and beyond?

To read this report, please visit: ey.com/GL/en/Services/Advisory

Global corporate divestment study

The rationale for making divestments is shifting. Our Global corporate divestment study finds many companies still using divestments as a short-term tactical tool, often to raise cash or pay down debt.

To read the study, please visit: ey.com/GL/en/Services/Transactions

Reporting magazine: March 2013

Reporting magazine brings together insights and ideas which we believe will interest and inform business executives who are involved in reporting in its broadest sense.


Performance magazine

The latest issue of Performance is now available, providing insights on what you can do to achieve growth and optimise your business.

To download a copy, please visit: performance.ey.com/2013/05/17/cross- industry-innovation-in-health-care-sector

Summer 2013

Tax transparency report

The trust an organisation builds with its stakeholders is critical. As a measure of an organisation’s contribution to the economies it operates in, tax is a key dimension in building that trust.

To download a copy, please visit: ey.com/UK/en/Services/Tax/Tax-Transparency-Report



Sub-FTSE 350 update

On 19 March, our sub-FTSE 350 ID Programme welcomed Mark Wood, former CEO of AXA and The Prudential, as a guest speaker, to provide his perspectives on the Eurozone. Speaking alongside Mark was Ernst & Young’s Chief Economist, Mark Gregory, who heads up the Ernst & Young ITEM Club.

The Eurozone, its future and relevance at this current time remains a heavily debated topic, and its importance continues to increase following the difficulties now being faced in Cyprus. Current thoughts and concerns are very much around the implications that could result from other Eurozone members falling into similar difficulties.

Mark Wood was the first to provide his views and summarised them into four main areas:

1 Recovery and what conclusions could be drawn from the buoyancy being experienced in the FTSE Over half of the revenue from FTSE 100 companies is generated outside the UK. Should we actually view this as a more positive indicator of a recovery, particularly given elements of renewed optimism extending from the United States? The overriding message was generally one of caution rather than optimism when interpreting the drivers behind high

share prices. For example, higher demand can sometimes be driven from the threat of unemployment, a supporting trend being the continued high regional unemployment in the UK.

2 The macro-view of Europe and whether the Eurozone will collapse Whilst there have been some well publicised difficulties faced by countries such as Cyprus, Greece, Ireland and Portugal, the Eurozone is ultimately dominated by a smaller concentration of nations such as Germany and France. The discussion also highlighted GDP generated per capita, which was relatively strong in Greece and Portugal when compared with China, demonstrating the resultant impact of the relatively smaller populations .

3 Inflation and how to understand its impact Inflation was joked about as being the great hope of many, our Chancellor being no exception. Recent attempts to change the manner in which inflation is measured were discussed. However, in reality, underlying inflation remains considerably higher than that published.

4 Demographics and the impact of the ageing population Longer life expectancy continues to be a common problem across the Eurozone. One of the factors to longer-term sustainability is pensioners feeling they are in a position to consume. Keeping inflation under control is key to allowing such consumption to take place.

Our Sub-FTSE 350 Independent Director Programme focuses on the needs of independent directors (IDs) from sub-FTSE organisations across the private and public sectors. We regularly host workshops to discuss topical market issues and share insights on how businesses are adapting to cope with challenges in the wider economy and regulatory environment.

Sub-FTSE 350 update

Andy Glover is the Chairman of the Ernst & Young Sub-FTSE 350 Independent Director Programme.

Andy has been an assurance partner with Ernst & Young since 1996 and specialises in servicing the needs of mid-market businesses in our Strategic Growth Markets group in London. He is a Fellow of the Institute of Chartered Accountants in England and Wales, having won prizes in both parts of his professional exams.

He holds a First Class Honours degree in Mathematics from London University. He delivers audit and other assurance services to fast-growing businesses — listed, private equity backed and private companies — and has taken businesses through their growth journey, including fundraising, IPOs and exit.

Summer 2013


Mark Gregory’s discussion touched on some thought-provoking points around the role of Germany, including the recent comments from German economists on the need to ‘Germanise’ the Eurozone. Mark also addressed the ability of the Germans to keep their labour costs under tight control during the crisis, and the need to see through the existing, sometimes painful reforms in building a more sustainable Eurozone. The potential for following the impending German elections was also discussed, including restructuring of existing debt, a fiscal rebalance or potentially a break-up of the Eurozone.

Mark also discussed matters wider than just Germany, focusing on the importance of tax harmonisation in ensuring that fiscal harmonisation can work. In recent years policymakers have demonstrated that although they can’t kickstart growth, they can mitigate the impact of current market issues escalating. However, the consequence is, instead, felt within asset pricing and disparity in asset yields. The next decade is likely to continue to see muted growth, but is expected to yield the start of a fundamental re-organisation.

“ The overarching comment was that the Government should be an influencer of the business environment, rather than a spending engine.”

The Q&A session generated a lively debate, which included both speakers being challenged on their approach should they be in Chancellor Osborne’s shoes. Their responses highlighted the importance of fiscal stimulus, infrastructure investment and adopting a longer-term strategy of bringing production back into the UK (which is a key pillarstone in the planning process of the Germans). They stressed the importance of taking advantage of, and formulating, effective industrial and educational strategies. The overarching comment was that the Government should be an influencer of the business environment, rather than a spending engine.

The session closed with some rather more emotive remarks around the bitterness caused by the Eurozone having not achieved its purpose, and the likely shift in consumer patterns towards quality and loyalty to produce from their home countries. A good example of this was the expected change in consumer patterns as a result of the recent horsemeat scandal.

Our next Sub-FTSE 350 ID session is a discussion on executive remuneration, taking place on Tuesday, 9 July. Please contact Lindsey Grazier ([email protected]) for further information.


Regulatory snapshot

Regulatory snapshot

Board mattersOn 30 January 2013, the FRC published a consultation on proposals to implement the Sharman Panel recommendations on going concern. The Panel was established after concerns were raised in the House of Lords about the quality of information provided on the financial health of companies, and their ability to withstand economic and financial stresses.

The FRC proposes, amongst other things, revised guidance for directors on going concern.

• The revised guidance sets out two purposes of going concern reporting: stewardship and financial reporting.

• The Board should identify and evaluate threats to the company’s business model and capital adequacy, over a period longer than twelve months (i.e., the ‘foreseeable future’), taking account of economic and company business cycles.

• It should evaluate whether the company is a going concern, based on whether there is a ‘high level of confidence’ that solvency and liquidity risks can be managed effectively during a period of at least 12 months from the approval of the financial statements.

• The Board should disclose the significant risks to the company’s solvency and liquidity, and how they are being managed (as part of its discussion on principal risks in the business review), and confirm it has undertaken a robust going concern assessment.

• It would need to implement an ongoing process for the assessment of going concern, integrated within its business planning and risk management processes.

• Guidance also draws a distinction where the directors might be lacking a ‘high level of confidence’ in terms of the going concern status of the company for the foreseeable future, but it may still be appropriate to prepare the financial statements on a going concern basis, subject to the disclosure of material uncertainties.

• The consultation closed on 28 April 2013 and the FRC decided in June 2013 to re-cast and re-consult, to seek further clarification of its guidance, especially in the interests of SMEs.

ReportingThe FRC is reviewing feedback on its proposed UK reporting framework. This initiative was launched in response to its concerns that financial reporting is becoming more complex and less relevant. The framework has various aims e.g:

• Encouraging disclosures that are targeted towards meeting the needs of users, with the elimination of duplicate information.

• Empowering preparers to apply materiality to their disclosures more robustly, and avoid the use of boilerplate information within financial reports.

• Improving the organisation of disclosures to make financial reports easier to navigate, where information that meets set objectives is placed in the same section of a report.

• Encouraging standard setters to focus on defining reporting objectives, rather than introducing more reporting requirements.

• Curtailing piecemeal disclosure requirements that might arise from initiatives such as the European Commission (EC) proposals on non-financial information and integrated reporting.


Summer 2013

Governance frameworksThe European Commission (EC) launched, in December 2012, its Company Law and Corporate Governance Action Plan for 2013. Since then various proposals have been issued which include the following:

• The plan includes the introduction of new requirements for companies to enhance their disclosures on Board diversity and risk management. A proposal by the EC to introduce an amending Directive was published in April 2013.

• Proposals to increase the level of shareholder engagement on executive remuneration, and improve the visibility of shareholders and their voting activities. It is proposed that these changes will be introduced via the Shareholders’ Rights Directive.

• Initiatives to help improve shareholders’ control over related party transactions, and increase the transparency and ‘conflict of interest’ frameworks applicable to proxy advisors, possibly through an amendment to the Shareholders’ Rights Directive.

• Plans to work closely with the competent national authorities and the European Securities and Markets Authority (ESMA) with a view to developing guidance to increase legal certainty on the relationship between investor cooperation on corporate governance issues and the rules on acting in concert.

• Plans to investigate potential obstacles to trans-national employee share ownership schemes, and take appropriate action to encourage employee share ownership throughout Europe.

• The EC issued a consultation on its proposals to harmonise procedures across the EU for companies looking to transfer their registered office from one Member State to another.

FRC’s plans include initiatives to support corporate governance

The FRC published its draft plan and budget for 2013/14, which includes various initiatives that are likely to have a bearing on corporate governance in the UK.

• The FRC plans to develop new guidance covering Board evaluations, narrative reporting (to coincide with the final regulations), and remuneration (to cover the audit implications).

• It also intends to revise the UK’s guidance on internal controls and risk management, with updates to the Turnbull Guidance.

• A review is also planned, to consider whether a differentiated code of governance is required for the banking sector.

UK audit market The UK’s Competition Commission published its provisional findings on the state of the UK audit market.

• The provisional findings are that the audit market is restricted by factors that inhibit companies from switching auditors, and by the tendency for auditors to focus on satisfying management rather than shareholder needs.

• The Commission identified barriers to switching due to the difficulty in comparing the offerings of firms, judging quality in advance, and as a result of the relationship of mutual trust and confidence.



• They noted that auditors may be insufficiently independent from executive management and insufficiently sceptical in carrying out audits.

• The Commission did not find any tacit collusion between firms, bundling or similar market abuse, or excess profits.

• The Commission concludes that there are features of the market which may prevent, restrict or distort competition and that investors are not well-served by the audit market.

• In response, the Commission proposes various provisional remedies, e.g., mandatory audit tendering and rotation, expanded remit and/or frequency of regulatory reviews, prohibition of ‘Big 4 only’ bank covenants, strengthened accountability of the external auditor to the Audit Committee, enhanced shareholder-auditor engagement, and extended audit reporting requirements.

Audit quality debate reopens with new frameworkFrom May 2013, the International Auditing and Assurance Standards Board (IAASB) will be considering feedback on its proposed audit quality framework, to raise awareness of the key elements of audit quality.

• The framework outlines the main drivers of audit quality, which includes the delivery of an auditor’s opinion on the financial statements based on appropriate audit evidence obtained by an effective engagement team.

• An effective team exhibits appropriate values, ethics and attitudes. It is sufficiently knowledgeable and experienced and has the time necessary to perform the audit, by working to rigorous audit processes and quality control procedures, which includes appropriate interactions with a variety of stakeholders and the delivery of valuable and timely reports.

• The framework also recognises that audit quality is more likely in an environment where there is support from participants in the financial reporting supply chain, including the Audit Committee.

• The framework identifies the need for a greater level of international harmonisation in the evaluation of audit quality by Audit Committees. It also outlines the need for Audit Committees to provide more information to users on the work they undertake, the main issues they address, and the reasons for their conclusions.

EU auditing regulation The European Parliament’s lead committee on audit regulation (legal Affairs) agreed its compromise position on 25 April 2013. A key aspect of this position includes a proposal for mandatory audit firm rotation at least once every 14 years, with the option for a Member State to extend this period to 25 years where, during the 14-year engagement period, there has been: a public tender, or comprehensive assessment of the auditor by the audit committee, or a joint audit.

• Other matters covered in the committee’s position include a rejection of mandatory tendering and the removal of a cap on fees for non-audit services. On the subject of non-audit fees the committee also recommends that the list of prohibited non-audit services should be closely aligned with the existing IESBA Code. Permitted services should be subject to audit committee approval and the EC’s proposal for audit-only firms was rejected.

• Despite this development the EU legislative process is far from over. The European Council (of Member States) must also agree on its compromise position before all three entities (Commission, Council and Parliament) can start to discuss an overall common agreement. This means it is unlikely that a plenary vote in the European parliament will take place before the autumn of this year.

Further disclosures from auditorsThe FRC introduced new disclosure requirements for the auditors’ report in June 2013. Changes include:

• A requirement that the auditor describes the assessed risks of material misstatement which have the greatest effect on the overall audit strategy, and the allocation and direction of the audit engagement team.

• An explanation of how the auditor applied the concept of materiality, in planning and performing the audit, should be reported.

• The auditor to provide a summary of the audit scope, including an explanation of how the scope was responsive to the assessed risks of material misstatement and the auditor’s application of the concept of materiality.

Regulatory snapshot


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Ernst & Young and the ‘Fair Tax’ debate

Ernst & Young and the ‘Fair Tax’ debate

The age of austerity, increasing public pressure and the impact of globalisation on business models, means that the tax affairs of companies and individuals are being scrutinised like never before and these companies and individuals are being asked to demonstrate their contribution to society. As governments seek to reduce their deficits they are, and need to be seen to be, taking action.

At the heart of the issue is a debate about the right boundary between acceptable and unacceptable tax planning. It is clear that tax evasion, such as taxpayers deliberately misrepresenting or concealing the true

The ‘Fair Tax’ debate — whether multi-national companies (MNCs) and high net worth individuals are paying their fair share of tax — has consistently been front page, international news for many months and is likely to be so for the foreseeable future.

state of their affairs, is morally and legally unacceptable. After that, the question of where the boundary lies is difficult to answer. Is it right to believe that companies and individuals should not consider how to reduce their tax bills at all, but should pay whatever the unplanned actions might deliver, on the basis that this is the ‘fair amount of tax’? This would be troubling, since companies have a duty to mitigate tax by lawful means and boost shareholder value. When we move away from the rule of law, there is no objective arbitration of what a fair amount of tax is. In this scenario, important distinctions can become blurred, with the risk that tax-informed decisions by MNCs (which have a natural ability to choose where to invest) are viewed in the same light as some of the more apparently egregious personal tax shelter cases we have seen in the press in recent months. This cannot be right and I know many of our clients feel the same.

As a Big 4 firm, we have a vital role to play in helping to develop more effective tax systems around the world and also to enable our clients to fulfil their legal responsibilities and meet their business objectives. We’ve always talked with our clients, government, the market and regulators about tax challenges. We constantly evaluate our role and contribution to society

John is the Head of Tax Services for the UK and Ireland Region of Ernst & Young and, as such, is one of Ernst & Young’s most senior tax partners.

John is a member of the management team for UK&I.

He has over 20 years experience advising multinational companies on international and UK tax planning. John’s main client focus is Private Equity where he has led the structuring of a number of landmark P/E deals. John has written a number of books over the years, including Tolley’s International Tax Planning, Tolley’s Trading in Europe, The Taxation of UK companies trading overseas and The Taxation of E Commerce.


Summer 2013

ever before. They are considering all angles to the debate and establishing how vulnerable they are to challenge. Regardless of the impact that the Fair Tax debate has on the way clients do business, a more strategic issue is their approach to tax transparency and how they communicate with stakeholders. Many of the organisations we have spoken to are concerned that increased transparency will not deliver greater understanding to stakeholders. Instead, it could create a potentially significant administrative burden and might result in divulgence of commercially sensitive information that could be misused. Ultimately, they are concerned that greater tax transparency may not appease all sections of the fair tax lobby.

What is clear to us is that organisations cannot ignore the call for greater tax transparency. They need to consider the role and extent of greater transparency about the taxes they pay as part of stakeholder management if they have not already done so. Groups will, of course, need to form their individual views on any additional voluntary disclosures, but we expect to see more groups choosing to disclose more information, with a view to giving stakeholders better-quality insights into their tax profile.

Away from the Fair Tax debate, Ernst & Young has been leading this year on our ‘UK is open for business’ agenda. This goes to the heart of the UK Government’s intention to encourage investment and its stated objective of making this country’s tax regime the most competitive in the G20. We are helping many of our clients to restructure to make the UK more central to their operations and headquarter activities. This shows that they continue to see the UK as an attractive place to be despite some of the current uncertainty.

to ensure that we do genuinely help to build a better working world. However, with no certainty as to where the fair tax debate will lead I am convinced that, in this global economy, tax competition will continue.

So how do we see our clients responding?The involvement of governments, NGOs and tax activist organisations as well as the public, investors and analysts means this issue transcends the tax function. Our clients tell us managing stakeholder confidence is a business-critical issue, so the need for them to have a well thought through response to the Fair Tax debate is clear.

Clients are addressing this at the highest level and asking themselves pretty fundamental questions:

1 Do all internal stakeholders understand the issue and do they have an appropriate level of awareness of what increased tax activism and media scrutiny means for the business?

2 Is there a common understanding of the tax strategy of the group and does this really fit within the business’s wider corporate and social responsibility agenda?

3 Do all stakeholders have a common understanding of tax risk and the tax implications of business risk?

4 Does the Fair Tax debate change anything in this regard?

As a minimum, this increased focus on Fair Tax means our clients are looking to manage their tax risk, compliance and reporting agendas better than

“ What is clear to us is that organisations cannot ignore the call for greater tax transparency.”


Upcoming events

Regional events

London-based events

Edinburgh

For further information please contact: Kate Heriot +44 131 777 2369 [email protected]

Board effectiveness and the role of the independent director

Tuesday 3 September Dinner 18.00–21.00

Speaker: Richard Wilson, Ernst & Young

FTSE 350 ID Programme

This programme is open to IDs of FTSE 350 companies.

Eurozone

Tuesday 15 October Lunch 12:00–14:00

Speaker: Mark Gregory, Ernst & Young

The investor’s evolving role in stewardship

Tuesday 22 October Dinner 18:00–21:00

Speaker: David Pitt-Watson, Former CEO of Hermes Focus Funds

Sub-FTSE 350 ID Programme

This programme is open to IDs holding Board roles at Sub-FTSE 350 companies.

Executive remuneration — trends and updates

Tuesday 9 July Breakfast 08:30–10:30

Speaker: Giles Capon, Ernst & Young

Risk and personal reputation

Thursday 12 September Lunch 12:00–14:00

Speaker: John Smart, Ernst & Young

Audit Committee Chair Programme

Personal and reputational risk — do you really know what is at stake?

Tuesday 17 September Lunch 12:00–14:00

Speaker: John Smart, Ernst & Young

CFO succession planning

Tuesday 8 October Breakfast 08:30–10:30

Speaker: Mark Freebairn, Head of European CFO practice for Odgers

FS events

For further information please contact: Ellie King +44 20 7951 3997 [email protected]

Solvency II: are we nearly there yet?

Wednesday 17 July 18.00–21.00

Speaker: Martin Bradley, Ernst & Young

Emerging issues

Wednesday 11 September 18:00–21:00

Emerging issues

Wednesday 16 October 08:30–10:30

For further information please contact: Eirini Vogiatzi 020 7951 6061 [email protected]

Senior Marketing Executive FTSE 350 Independent Director Programme — London

Lindsey Grazier 020 7951 4822 [email protected]

Marketing Executive Sub-FTSE 350 Independent Director Programme — London

If you are not currently receiving our ID programme emails, please send your email address to [email protected] and we will add you to receive our programme updates.


Summer 2013

Other networks and associations for independent directors

Natural Resources NED Forum This quarterly run forum is specifically designed for non-executive directors in the natural resources sector (Oil and Gas; Mining and Metals) and focuses on some of the core elements of NED effectiveness such as leadership, quality of judgement and staying ahead of market trends. The forum events are tailored to provide practical guidance using firsthand insight from keynote speakers, real life case studies and expert opinion from professional advisers.

To register your interest please contact Amir Hussain: [email protected]

ITEM Club The Ernst & Young ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury model of the UK economy. ITEM’s forecasts are independent of any political, economic or business bias, providing an impartial benchmark for other private and public economic forecasts. Quarterly briefing events provide an opportunity for you to hear an exclusive preview of the latest forecast a week ahead of the official launch. You will also receive the four-page summary report, Economic Outlook for Business.

For further details and to join ITEM Club events please email [email protected]

Please note that ITEM Club events are not specific to the ID audience.

Key Executive Programme We run this programme to provide our clients (particularly Private Equity clients) with selective introductions to senior industry figures, experienced proven management, CEOs, NEDs or investing Chairmen. Candidates joining the programme discuss with us their personal proposition and we support them to help them better understand private equity and to enable them to bring strategic industry content and added value to clients who may be seeking strategic guidance on a bid, or a management solution to a portfolio asset.

If you would like to know more, or are interested in joining the programme as a candidate, please contact Caroline Ross: [email protected]

We are also delighted to be associated with the following organisations

ITNEA — sponsored by Ernst & Young ITNEA is the UK association for non-executive directors and chairmen of listed TMT (technology, media and telecommunications) companies. It has over 500 members and meets three times a year for a networking dinner with a keynote speaker in London with, typically, 70 attendees at each event.

To find out about upcoming ITNEA events or how to join, please email [email protected]

The Financial Times Non-Executive Directors’ Club We are delighted to be sole sponsor the FT NED Club which provides aspiring and existing non-executives with support in finding appointments, a variety of networking and development opportunities through tailored events and updates on corporate governance issues through the non-execs.com website.

Criticaleye — The Network of Leaders We are pleased to announce our role as an advisory member of Criticaleye as of November 2012.

Criticaleye is an exclusive membership community for chairmen, nonexecutives and executive directors, providing a carefully managed blend of tailored events, content and facilitated peer-to-peer connections. Access to Criticaleye — The Network of Leaders, enables chairmen and non-executives to build new relationships, develop a stronger boardroom profile and benchmark with a diverse peer group in a secure and trusted environment.

To find out more about Criticaleye’s non-executive membership, please contact: [email protected]

Ernst & Young LLP

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

About Ernst & Young’s Assurance ServicesAround the world, the journey to success is governed by increasingly complex and broadening regulatory requirements and stakeholder demands. Strong independent assurance helps meet these demands by providing a timely and constructive challenge to management, a robust and clear perspective to audit committees and critical information for investors and other stakeholders. The quality of our audit starts with our 60,000 assurance professionals, who have the breadth of experience that comes from auditing many of the world’s leading and fastest growing companies, and to whom we provide ongoing personal and professional development. We provide a consistent worldwide audit by assembling the right multidisciplinary team to address the most complex issues, using a proven global methodology and deploying the latest, high-quality auditing tools and perspectives. And because we understand that, to achieve your potential, you need a tailored service as much as a consistent methodology, we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference.

The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London, SE1 2AF.

© Ernst & Young LLP 2013. Published in the UK. All Rights Reserved.

In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.

Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.

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