Letter from the chairman of the Company
Report by Roberto Quarta
Chairman of the Company and chairman of the Nomination and Governance Committee
Dear share owner
his is my first letter as chairman of your Company, having taken up the role last June.
I have run companies in sectors as diverse as manufacturing, engineering, distribution and electronics so, while my background is not in advertising and marketing services, I would like to think that this degree of separation from the business, and the breadth of my own experience, lend both independence and perspective – two qualities essential for any chairman.
Over the years people have asked me: what is the chairman’s agenda? That’s easy. There is none. There is only the agenda of our stakeholders: whether they are our people, clients, share owners or the broader communities with whom we have relationships.
With that in mind, here are some notes from a relative newcomer after what has been yet another record year for WPP.
First, reasons to celebrate. We have an excellent business. It is well run. It produces stellar results year in, year out and enjoys – on balance – contented investors.
One of the differences between our business and many others is that its principal assets are not plant and machinery, but human. Senior staff retention is strong. The business was built in part through acquisition and many founders of acquired companies are still with us long after their earn-outs have ended.
Speaking of entrepreneurs, it hardly needs me to say that your Company’s founder has made an extraordinary contribution to this business as CEO. The accolades Sir Martin receives on a regular basis say it better than I ever could. In the last year alone he was named the world’s fifth best performing CEO by the Harvard Business Review, and voted the joint most impressive business person in the UK in the Ipsos MORI Captains of Industry survey.
This recognition matters, because it adds to the reputation of your Company and all the operating businesses within it. Sir Martin’s public profile, as one of the world’s most successful CEOs and a leading commentator on global economic affairs, is of enormous material value to WPP, bringing prestige, talent and new business to the Group.
Second, some reflections. Times are always changing. WPP’s succession planning, as my distinguished predecessor Ambassador Philip Lader said last year, is “steadily more rigorous and comprehensive.”
We are obliged to consider succession from two angles: first, as an orderly, planned process; and second, as something potentially more sudden as recent tragic events have shown. As Philip said, “Sir Martin, like all of us, is not immune from being hit by the proverbial bus.”
At some point we all leave our jobs. The question is when. Whether, in Sir Martin’s case, that happens tomorrow, in one, two, three, four or five years, or even over a longer period, we have already begun to identify internal and external candidates who should be considered.
Since joining your Board, I have seen first-hand a rigorous and comprehensive process, where independent members of the Board and the chairman regularly meet not just those who report directly to Sir Martin, but also the senior tier below.
Seeing people regularly, gives your Board insight into individual businesses and helps us get to know senior management and consider whether they have the attributes for a future chief executive of this Group.
Do they understand the Group or just their own business? Familiarity with clients, familiarity with strategy are key. What would they do if they became chief executive?
Before and since my appointment, the Board has had a very productive session in which all members shared views on who, specifically, might or could succeed Sir Martin now or in the more distant future. The list of candidates discussed must be constantly refined and reconsidered and I and the other independent members of the Board will continue to focus on this in 2016 and beyond.
Share owners should have no doubt that we already have a strong pool of internal and external candidates to draw from.
Third, some predictions. This may be my first year as your chairman, but I am aware of the rhythms and rituals of the Company calendar.
In the lead-up to our AGM there will be debate about compensation.
The record performances that form executive pay mean that share owners have been handsomely rewarded over the
years as their investments increase in value substantially. But there are critics.
The first thing to remember about compensation schemes is that they don’t happen overnight. The headlines we will inevitably read concern obligations and agreements put in place several years ago for our executives.
The Board must assess whether pay is aligned with share owner interest. That’s not about quantum. It’s about alignment. Was the pay plan approved by a majority of share owners? The answer is yes. The plan was laid out; the results are laid out. The performance is there; the metrics are there. This is a matter of record, contract and history. It is not the future.
Other changes are on the horizon. This year we have instituted an externally-facilitated Board review by a leading expert in the field.
I promised share owners that we would appoint a well-known, respected professional to review our Board composition and effectiveness and that we would report in due course on the outcome.
The review has evaluated Board processes, Board discipline, composition, dynamics and effectiveness. Our expert has attended Board and committee meetings as an observer and held one-to-one discussions with each director and the Company Secretary.
The full report will be considered by the Board at the end of April and will help us to be a more effective and efficient Board, whose agenda reflects the needs of the Board, and the Company’s stakeholders. This is my job and one I aim to do with fresh eyes and ears.
As part of the Board evaluation process, we are identifying its strengths and weaknesses. Perspective is vital. My idea of a great Board is a group of diverse people sitting round the table who bring informed, well thought-out, experienced perspectives and who, when combined, add value to the business.
While the proportion of women on our Board, for example, is in line with internal targets of 30%, there is always room for further improvement.
Fourth, a thank you and a sad farewell. As I complete my first letter to share owners, I would like to thank Philip Lader for his outstanding 14 years as your chairman. His ready wit, fine style and tremendous scope of vision are well known.
On behalf of every Board member I wish him the very best for the future and register our deep gratitude for his service.
I would also like to remember and honour the wisdom and service of Roger Agnelli, a non-executive director since 2013 who died tragically in March this year.
Finally, in conclusion, a pledge. I am well aware that I can only claim the status of newcomer for so long, and that I have a window of opportunity to deliver the things I have described. I do not intend to delay.
Whatever issues we identify collectively will not be solved by revolution – they’ll be solved by evolution. Logical steps, clearly understood by all, taken in the interests of everyone with a stake in the future of this remarkable Company.
15 April 2016
Review of the Company’s governance and the Nomination and Governance Committee
Report by Roberto Quarta
Chairman of the Nomination and Governance Committee
Nomination and Governance Committee members
Nomination and Governance Committee members
|Attendance at 4
meetings in 2015
|1 Appointed to the committee on 9 February 2015.
2 Retired from the committee on 9 June 2015.
3 Retired from the committee on 10 October 2015.
4 Appointed to the committee on 10 October 2015.
5 Roger Agnelli tragically died on 19 March 2016.
|Roberto Quarta (Chairman)1
Dear share owner
Committee responsibilities and how they were discharged in 2015
he principal focus of the four meetings of the Nomination and Governance committee in 2015 were:
- succession planning for the CEO and senior management;
- Board and committee composition
- the appointment of a new senior independent director and chairman of the Audit Committee;
- Board evaluation; and
- share ownership guidelines for non-executive directors.
As the new chairman and chairman of the Nomination and Governance Committee, I have had extensive discussions with share owners on the issue of succession and understand their request for greater transparency of reporting and to integrate the Board evaluation process with succession planning. The committee and the full Board fully appreciates that strategic, thoughtful and practical succession planning is critical to the long-term success of the Company.
The Board has for some time had a strategy in place for an agreed or foreseen departure of the senior management team including the CEO and CFO and also in the event of sudden emergencies where an individual cannot continue working.
During 2015, the Board has held three detailed senior management and CEO succession planning reviews and has met with the senior management teams of all of the major operating companies within the Group and in many cases the tier of managers below to develop their understanding of the diversity of the pipeline of internal candidates and continually reassess the succession plans.
The committee has also considered the attributes for future non-executive director appointments in the context of the strategic development of the Group, which include business-specific and digital or data analytics expertise, back office integration and UK governance experience.
New senior independent director
The Board announced the appointment of Nicole Seligman as senior independent director on 4 April 2016, following the recommendation of the committee and succeeding Jeffrey Rosen who retired at the 2015 AGM. Ms Seligman was appointed to the Board in January 2014 and has served on the Compensation Committee and attended the other bcommittee meetings at the invitation of the chairmen of those committees.
Jacques Aigrain succeeded Colin Day as chairman of the Audit Committee with effect from the close of the 2015 AGM following the recommendation of this committee. Jacques Aigrain has been a member of the committee since joining the Board in May 2013 and is considered as the committee’s financial expert for Sarbanes-Oxley Act (SOX) purposes and together with Charlene Begley as having recent and relevant financial experience for the purposes of the UK Corporate Governance Code.
The committee reviewed the composition of each of the Board Committees and the Board agreed following that review to realign and reduce committee memberships in October 2015, to reflect the skills and interests of respective directors. Subject to their appointment and reappointment at the AGM, the amended composition of our three main committees will continue to be as follows:
Amended composition of our three main committees, subject to their appointment and reappointment at the AGM
|Committee composition 2016
|Nomination and Governance Committee
|Sir John Hood
Board and committee evaluation
The annual evaluation of the Board’s and all committees’
effectiveness was commenced at the end of 2015 following
the appointment of the new chairman and the realignment
of the committee memberships. The evaluation process is
being externally facilitated by Dr Tracy Long of Boardroom
Review Limited who has no other connection with the
Group. Dr Long has attended Board and committee
meetings as an observer and has held one-to-one
discussions with each director and the Company Secretary.
Dr Long’s observations from these discussions and meetings
are being reviewed by the Board with proposals being made
to the full Board as to improving Board effectiveness
The results of the evaluation will be considered in the 2015 Sustainability Report to be published in June 2016 and discussed as part of the ongoing dialogue with share owners.
UK Corporate Governance Code
During the year, the Board was briefed on regulatory and corporate governance developments. This principally included the anticipated impact of the new UK and EU rules on auditing market reform and the changes to the UK Corporate Governance Code. The briefing focused especially on the changes related to remuneration, ongoing risk management and internal control and the requirement for directors to provide a longer term viability statement in respect of the financial year ended 2015 taking into account the Group’s current position and principal risks.
Share Ownership Guidelines
The committee reviewed the guidelines for non-executive director share ownership considering practices in the UK and the US and investor guidance. The committee recommended and the Board approved that non-executive directors should accumulate shares with a value equivalent to one year’s fees on a post-tax basis during their tenure, to align the interests more fully with share owners.
Paul Richardson, chairman of the Company’s Sustainability Committee, presented a comprehensive assessment of the Group’s sustainability performance and risks to the committee for 2015. A more detailed review of our sustainability performance and activities can be read in the Sustainability review and in our 2015/2016 Sustainability Report and Pro bono book to be published in June 2016.
Terms of reference
The committee’s terms of reference, which are reviewed with the Board annually and most recently in April 2015, are on the Company’s website at wpp.com/investor.
15 April 2016
Review of the Audit Committee
Report by Jacques Aigrain
Chairman of the Audit Committee
Audit Committee members
Audit Committee members
|Attendance at 8 meetings in 2015
|Jacques Aigrain (Chairman)
Dear share owner
e held eight meetings during the year, which were attended by Deloitte LLP, the Company’s external auditor, the Company’s chairman, the Group finance director, the director of internal audit, the Group chief counsel, the Group chief accountant and the Company Secretary.
Committee responsibilities and how they were discharged in 2015
The main matters we dealt with during 2015 were as follows:
- monitoring the integrity of the Company’s financial statements and reviewing significant financial reporting judgements;
- reviewing internal controls and internal audit activities;
- assisting the Board in meeting its responsibilities in respect of carrying out a robust assessment of the principal risks affecting the Group and reviewing and reporting on the systems and key elements of risk management as they affect the Group;
- reviewing the Group Treasury policy with particular focus on debtors, funding foreign exchange and cash management and the continued ability of the Group to adopt the going concern basis in preparing financial statements;
- reviewing reports on any material litigation or regulatory reviews involving Group companies;
- reviewing the Group’s mergers and acquisitions strategy, any significant acquisitions, the earnout payments profile review and integration processes and the debt financing by the Group;
- reviewing GroupM’s trading model and its risk assessment processes;
- reviewing the Group’s tax strategy;
- monitoring the accounting and legal reporting requirements, including all relevant regulations of the UK Listing Authority, the SEC and NASDAQ and the Jersey Financial Services Commission and changes to the UK Corporate Governance Code;
- overseeing continued compliance with Section 404 of SOX, through regular status reports submitted by the internal and external auditors;
- reviewing the Group’s IT transformation project and integration initiatives; and
- reviewing issues raised on our Right to Speak helpline and the actions taken in response to those calls.
Fair, balanced and understandable
A sub-committee of the Board including two members of this committee examined whether the Annual Report and Accounts for 2015 was fair, balanced and understandable and provided the information necessary for share owners to assess the Group’s position, performance, business model and strategy. The sub-committee received an early final draft of the report for review and comment, as well as a report from the Disclosure Committee as to the governance relating to compilation of the report. The Board subsequently considered the report as a whole and discussed the report’s tone, balance and language for compliance with these standards. The Board’s statement on the report is here.
Financial reporting and significant financial judgements
The management team make key decisions and judgements in the process of applying the Group’s accounting policies. These key judgements were detailed in reports to the committee in respect of 2015 which were then examined by the committee and discussed with management.
Deloitte also reported to and discussed with the committee whether suitable accounting policies had been adopted in the financial statements for the year ended 2015 and whether management had made appropriate estimates and judgements. The areas of significant judgement considered by the committee and how these were addressed are set out below and reflect a number of the principal risk areas identified by the Board in the Strategic report to share owners:
- the assessments made for goodwill impairment. The committee confirmed, based on management’s expectations of future performance of certain businesses, the level of goodwill impairment charges required in 2015;
- the restructuring charges incurred as part of a restructuring program in 2015 relating to Kantar, GroupM and IBOPE and whether these are exceptional. The committee supported management’s analysis of the nature of the restructuring charges;
- the judgements made in determining the gains on investments made in 2015 on the comScore, eRewards and Chime transactions. The committee agreed that the approach adopted by management is appropriate;
- the judgements made in respect of the recoverability of other media income and revenue recognition, particularly as these relate to media volume income and media trading income. The committee received briefings from Deloitte and management on the appropriateness of the policies adopted and the controls in place and challenged management to demonstrate the effectiveness of such controls;
- the valuations of non-controlled investments, which are based on local management forecasts, recent third- party investment and other supporting information such as industry valuation multiples. The committee examined the valuations with management and considered the sample testing of the investments performed by Deloitte and agreed that the valuations were appropriate;
- the accuracy of forecasting the potential future payments due under earnout agreements in respect of acquired businesses. The committee considered the forecasting with management and the testing undertaken by Deloitte and agreed that earnouts have been accounted for on a consistent basis to previous periods;
- the approach taken by management to accounting for exceptional expenses incurred in relation to the ongoing IT Transformation project, which the committee considered was appropriate;
- the valuation of year-end provisions in respect of working capital. The committee received briefings on the approach taken by management in assessing the level of exposure across the Group and agreed it was consistent and appropriate;
- accounting for the judgemental elements of remuneration, including pensions, bonus accruals, severances and share-based payments. The committee agreed that the assumptions applied by management are reasonable;
- the judgements made in respect of tax, in particular the level of central tax provisioning. The committee supported management’s assumptions in both these areas and believe the current level of provisions is reasonable; and
- the going concern assessment and viability statement and key forecast assumptions. The committee concur with management’s going concern assumptions as set out here.
Deloitte have been WPP’s auditors since 2002. The lead partner rotates every five years and the latest rotation took effect during 2015. In 2015, the effectiveness of the audit process was evaluated through a committee review of the audit planning process and discussions with key members of the Group’s finance function. The 2015 evaluations concluded that there continued to be a good quality audit process and constructive challenge where necessary to ensure balanced reporting. The committee held private meetings with the external auditors and the committee chair met privately with the external auditors before meetings. The committee continues to be satisfied with the performance of Deloitte and confirmed that Deloitte continues to be objective and independent and noted the principal findings of the FRC 2014 Audit Quality Review on Deloitte. The committee recommends the reappointment of Deloitte at the AGM on 8 June 2016.
The committee considered the Group’s position on its audit services contract in the context of the regulations concerning the audit market. Although there is no immediate intention to tender the audit contract, the Company will re-tender at the latest by the 2022 year end in compliance with the transitional arrangements for competitive tender that require mandatory rotation after the 2023 fiscal year-end.
The Company confirms that it has complied with the Competition and Markets Authority final order on mandatory tendering and audit committee responsibilities.
The annual internal audit plan is approved by the committee at the beginning of the financial year. Progress against the plan is monitored through the year and any changes require committee approval. Significant issues identified within audit reports are considered in detail along with the mitigation plans to resolve those issues. The committee also considers the level of internal audit resource to ensure it is appropriate to provide the right level of assurance over the principal risks and controls throughout the Group.
The committee has established a policy regarding non-audit services that may be provided by Deloitte, which prohibits certain categories of work in line with relevant guidance on independence, such as ethical standards issued by the Auditing Practices Board and SEC. The policy was reviewed by the committee in 2014 and advice on remuneration was included in the prohibited category with effect from the beginning of 2015 allowing for a transition period. Other categories of work may be provided by the auditors if appropriate and if pre-approved by the committee, either as individual assignments or as aggregate amounts for specified categories of services. All fees are summarised periodically for the committee to assess the aggregate value of non-audit fees against audit fees. The level of fees for 2015 is shown in note 3 of the financial statements PDF (1.07MB).
The committee and its members were formally assessed by the Nomination and Governance Committee as part of the review of committee composition in 2015 and as part of the evaluation process described in the Review of the Company’s governance and the Nomination and Governance Committee for their technical suitability to be members and also for its overall effectiveness. The Board has designated me as the committee’s financial expert for Sarbanes-Oxley Act (SOX) purposes and together with Charlene Begley as having recent and relevant financial experience for the purposes of the UK Corporate Governance Code. The members of the committee have financial and/or financial services experience as set out in their biographies.
Terms of reference
The committee’s terms of reference, are reviewed annually and most recently in April 2015 and can be viewed on the Company’s website at wpp.com/investor.
This is my first report as chairman of the committee and I would like to thank Colin Day for his hard work over many years as a member of and subsequently chairman of the committee. We will greatly miss Roger Agnelli from the committee – his commitment and wisdom were appreciated by all of us who were privileged to work with him.
15 April 2016