Corporate Governance

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The Company is committed to maintaining high standards of corporate governance. The Board recognises that it is accountable to the Company’s shareholders for corporate governance and this statement describes how the Company has applied the principles of the Combined Code on Corporate Governance (the Code) as appended to the Listing Rules of the UK Listing Authority. Throughout the year to 31 December 2007, save as otherwise explained in the paragraph headed ‘Compliance with the Code’ on page 44, the Board believes that the Company was in compliance with the provisions of the Code.

The Group is controlled through its Board of Directors. The Board’s main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s strategic objectives and to ensure that the necessary financial and other resources are made available to enable those objectives to be met. The Board has a schedule of matters reserved for its approval which is kept under review.

Specific responsibilities of the Board include: setting Group strategy and approving the annual budget; reviewing operational and financial performance; approving major acquisitions, divestments and capital expenditure; reviewing the Group’s systems of internal controls and risk management; ensuring that appropriate management development and succession plans are in place; reviewing the health and safety performance of the Group; approving appointments to the Board; and approving policies relating to Directors’ remuneration and Directors’ contracts.

Board papers and other relevant information are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. This information is supplemented by information specifically requested by the Directors from time to time.

There is a clear division of responsibilities between Dr West as Non-executive Chairman and Mr Atkinson who, as Chief Executive, is the Director ultimately responsible for the running of the Group’s business.

The Chairman is responsible for the following matters pertaining to the leadership of the Board:

• ensuring appropriate Board composition;
• ensuring effective Board processes;
• setting the Board’s agenda;
• ensuring that Directors are properly briefed in order to take a full and constructive part in Board and Board Committee discussions;
• ensuring effective communication with shareholders; and
• ensuring constructive relations between Executive and Non-executive Directors.

• formulating strategy proposals for the Board;
• formulating annual and medium-term plans charting how this strategy will be delivered;
• apprising the Board of all matters which materially affect the Group and its performance, including any significantly underperforming business activities; and
• leadership of executive management to enable the Group’s businesses to deliver the requirements of shareholders:
  • ensuring adequate, well-motivated and incentivised management resources;
  • ensuring succession planning; and
  • ensuring appropriate business processes.

The Board currently comprises the Chairman, five other Nonexecutive Directors and four Executive Directors. The names of the Directors at the date of this report, together with their biographical details, are set out on pages 30 and 31. All these Directors served throughout the year, except Mr Roy Franklin, who was appointed on 19 July 2007. The Board included at least four Independent Non-executive Directors throughout the year.

The Board considers all the Non-executive Directors, with the exceptions of Dr West and Mr López Jiménez, to be independent of management. Dr West was Chief Executive from 1982 to 1995 and is not, therefore, considered to be independent of management. Mr López Jiménez is associated with GTCEISU Construcción, S.A. (GTCEISU), which is a 49% shareholder in Keller-Terra S.L. and a 6% shareholder in Keller Group plc. Whilst the Board considers Mr López Jiménez to be independent in character and judgement, he is not deemed to be independent of management under the Code, in view of GTCEISU’s shareholding in Keller Group plc.

The Non-executive Directors constructively challenge and help to develop proposals on strategy and bring strong independent judgement, knowledge and experience to the Board’s deliberations. Mr Brown is the Senior Independent Director.

There is an agreed procedure for individual Directors to obtain independent professional advice and all Directors have unrestricted access to the Company Secretary and Chairman. The Company Secretary is responsible for advising the Board, through the Chairman, on all governance matters.

The Chairman has no other significant professional commitments.

The Board had eight full meetings during the year. A table showing attendance at these meetings, and at meetings of Board Committees, is set out on page 43.

One of these Board meetings was held in the Middle East, giving the Board an opportunity to visit operational locations, to receive presentations and to meet some of the Group’s senior managers.

In addition, during the year the Chairman met with the Non-executive Directors without the Executive Directors present and there was regular informal contact between the Directors.

On appointment, Directors are provided with information about the Group, the role of the Board and the matters reserved for its decision, the terms of reference and membership of the Board Committees and the latest financial information about the Group. This is supplemented by visits to key locations and meetings with key senior executives to develop the Directors’ understanding of the business.

Throughout their period of office, Non-executive Directors are continually updated on the Group’s business, its markets, social responsibility matters and other changes affecting the Group and the industry in which it operates, including changes to the legal and governance environment and the obligations on themselves as Directors.

After carrying out formal, questionnaire-based evaluations of the Board and its Committees in 2004 and 2005, and a more open, discussion-based exercise in 2006, the Board did not carry out performance evaluations in 2007. Instead, the Board felt that it was appropriate to wait until after the Board changes, which took place during the year and at the start of 2008, before taking a fresh look at its performance.

An evaluation exercise is being carried out in the first quarter of 2008, which will be reported in next year’s Annual Report.

All Directors are subject to election by shareholders at the first Annual General Meeting following their appointment and, subject to satisfactory performance evaluation where appropriate, to re-election thereafter at intervals of no more than three years.

Throughout the year, the Company regularly meets with and makes presentations to institutional investors in the UK, Continental Europe and the US. These include meetings following the announcement of the annual and interim results with the Company’s largest institutional shareholders on an individual basis. The Senior Independent Director is available on request to meet with shareholders should they have concerns which contact through the normal channels of Chairman, Chief Executive or Finance Director have not resolved, or for which such contact is inappropriate. All major shareholders have the opportunity on request to meet new Non-executive Directors on appointment. On a regular basis, the Board is apprised of the views of the investment community through the circulation of investor perception surveys, brokers’ research notes and feedback from analysts.

The Annual General Meeting is normally attended by all the Directors and shareholders are invited to ask questions during the meeting and to meet with Directors after the formal proceedings have ended. The Notice of the Annual General Meeting, detailing all proposed resolutions, is posted to shareholders at least 20 working days prior to the meeting.

The Group maintains a corporate website, www.keller.co.uk, containing a wide range of information of interest to investors, including presentations to institutional investors and analysts. The website is updated with all formal communications to the investment community immediately following their release through a recognised news service.

The number of full Board and Committee meetings attended by each Director during the year was as follows:

Figures in brackets indicate the maximum number of scheduled meetings in the period.
*Appointed to the Board in July 2007.

Committee terms of reference
The terms of reference for the Remuneration, Audit and Nomination Committees are kept under regular review and are available on the Company’s website.

Remuneration Committee
The Remuneration Committee was chaired throughout the year by Mr Brown, an Independent Non-executive Director. The other members during the year, all of whom are also Independent Non-executive Directors, are shown on page 35.

This Committee is responsible for agreeing with the Board the framework and policy for the remuneration of the Group’s executive management and for determining the remuneration packages of the Executive Directors. The Directors’ Remuneration Report is set out on pages 35 to 41.

Nomination Committee
The Nomination Committee is chaired by Dr West, except if it is dealing with succession to the chairmanship of the Board. The other members during the year were Mr Atkinson, Dr Bond, Mr Brown, Mr Payne, Mr Scholes and, from the date of his Board appointment, Mr Franklin. The Nomination Committee’s role is to monitor the composition and balance of the Board and recommend to the Board the appointment of new Directors. Where appointments to the Board are under consideration, the Committee will normally employ external search consultants, except in respect of executive roles for which internal candidates have already been identified.

The full Committee did not meet throughout the year. A subcommittee, comprising Dr West, Mr Brown and Mr Scholes, met on several occasions for the purposes of selecting external search consultants to assist in the recruitment of a new nonexecutive director; interviewing candidates for role; and making a recommendation to the Board.

Audit Committee
Dr Bond, Mr Brown, Mr Payne and Mr Scholes, were members of the Committee throughout the year and Mr Franklin was a member from the date of his Board appointment. All members of the Committee are Independent Non-executive Directors. The Committee was chaired by Mr Payne until October 2007, when the chairmanship passed to Mr Scholes. The Board has satisfied itself that at least one member of the Committee has recent and relevant financial experience.

This Committee meets at least three times a year at which meetings the Company’s Auditors attend. At least once a year, the Committee meets privately with the external Auditors. The Committee assists the Board in observing its responsibility for ensuring that the Group’s financial systems provide accurate and up-to-date information on its financial position and that the Group’s published financial statements represent a true and fair reflection of this position. It also reviews annually the Group’s systems of internal control and the processes for monitoring and evaluating the risks facing the Group.

Since the start of 2007, the Audit Committee has discharged its responsibilities by:

• reviewing the Group’s draft financial statements prior to Board approval and reviewing the external Auditors’ reports thereon;
• reviewing the Group’s trading update announcements prior to release;
• reviewing the independence of the external Auditors and reviewing and approving the audit fee;
• reviewing the external Auditors’ strategy for the audit of the Group’s accounts;
• reviewing an annual report on the Group’s system of internal control and its effectiveness and receiving regular updates on key risk areas of financial control;
• reviewing management’s assessment of the key risks facing the Group and the related controls in place to mitigate those risks; and
• reviewing the need for an internal audit function.

The Committee also monitors the Group’s whistle-blowing procedures, ensuring that appropriate arrangements are in place for employees to be able to raise matters of possible impropriety in confidence, with suitable subsequent follow-up action.

Once a year, the Committee evaluates the external Auditors. This evaluation focuses on: the calibre of the audit firm (including reputation, presence in the industry, size, resources and geographic spread); its quality control processes; the quality of the team assigned to the audit; the audit scope, fee and audit communications; and the governance and independence of the audit firm.

Any work awarded to the external Auditors, other than audit and tax compliance, with a value in excess of £50,000 requires the specific approval of the Committee. Where the Committee perceives that the independence of the Auditors could be compromised, the work will not be awarded to them. Details of the amounts paid to the external Auditors during the year for audit and other services are set out in the notes to the consolidated financial statements.

The Board believes that the Company was compliant with the Code throughout the year, save in the following respect.

The Company has not, throughout the full year, met the requirement of the Code for at least half the board, excluding the chairman, to comprise independent non-executive directors. As previously stated, whilst under the Code Mr López Jiménez is not deemed to be independent of management, the Board considers him to be independent in character and judgement. Were he also deemed to be independent under the Code, the Company would have complied with the Code in all respects.

The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and can provide only reasonable, not absolute, assurance against material misstatement or loss.

The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board and accords with the guidance.

The principal elements of the internal control framework are as follows:

(a) Risk identification and evaluation
Managers are responsible for the identification and evaluation of significant risks applicable to their areas of business, together with the design and operation of suitable internal controls. These risks may be associated with a variety of internal or external sources including market cycles, acquisitions, people, technical risks such as engineering and project management, control breakdowns, disruptions in information systems, natural catastrophe and regulatory requirements. The identified risks, and the controls in place to manage them, are subject to continual reassessment. The Audit Committee formally reviews this process once every two years.

The Chief Executive reports to the Board on significant changes in the business and the external environment that affect significant risks. The Finance Director provides the Board with monthly financial information which includes key performance and risk indicators.

(b) Authorisation procedures
Documented authorisation procedures provide for an auditable trail of accountability. These procedures are relevant across Group operations and provide for successive assurances to be given at increasingly higher levels of management and, finally, to the Board.

(c) Management of project risk
Project risk is managed throughout the life of a contract from the bidding stage to completion.

Detailed risk analyses covering technical, operational and financial issues are performed as part of the bidding process. Authority limits applicable to the approval of bids relate to the risks and total value being bid by Keller, or any joint venture to which Keller is a party. Any bids involving an unusually high degree of technical or commercial risk, for example those using a new technology or in a territory where we have not previously worked, must be approved at a senior level within the operating company.

The average time on site is around six weeks but larger contracts may extend over several months. The performance of contracts is monitored by most business units on a weekly basis. In addition, thorough reviews are carried out by senior managers on any poorly performing jobs and full cost-to-complete assessments are routinely carried out on extended duration contracts.

(d) Budgeting and forecasting
There is a comprehensive budgeting system with an annual budget approved by the Board. This budget includes monthly profit and loss accounts, balance sheets and cash flows. In addition, detailed quarterly forecasts are prepared for the two subsequent years. Forecasts for the full year are updated during the year.

(e) Financial reporting
Detailed monthly management accounts are prepared which compare profit and loss accounts, balance sheets, cash flows and other information with budget and prior year, and significant variances are investigated.

(f) Cash control
Each business reports its cash position weekly. Regular cash forecasts are prepared to monitor the Group’s short- and medium-term cash positions and to control immediate borrowing requirements.

(g) Investments and capital expenditure
All significant investment decisions, including capital expenditure, are referred to the appropriate divisional or Group authority level.

(h) Independent reviews
The Group has a structured programme of independent reviews, combining internal ‘peer’ and outsourced reviews covering tendering, operational processes and internal financial controls. The intention is to conduct an independent review of all material business units at least once every three to four years. This programme is approved and monitored by the Audit Committee, which reviews the findings of each such exercise.

(i) Self-certification
Once a year, managers are asked to confirm the adequacy of the systems of internal financial and non-financial controls for which they are responsible; and their compliance with Group policies, local laws and regulations; and to report any control weaknesses identified in the past year.