Letter from the chairman of the Company

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

T

hat 2016 was WPP’s sixth consecutive year of record-breaking performance is testament to the fundamental strength of your Company, the robustness of its strategy and the calibre of its people.

The achievement is particularly noteworthy in light of the challenging trading environment in which WPP’s various businesses and their clients operate – with global economic growth continuing to underwhelm.

This environment is the backdrop to the more cautious outlook for 2017 that the Group presented in its Preliminary Results for 2016. WPP’s stellar performance over many years means expectations are, rightly, set at the highest level. The true test of a business, however, is its ability to deliver through economic cycles, adapt to changes in the market and navigate bumps in the road – an ability your Company and its management team have demonstrated in spades for more than three decades.

Even the most smooth-running of engines needs fine-tuning, which is why we conducted an externally facilitated Board review during 2015-16 to evaluate Board processes and effectiveness. A respected external expert – a leader in this field – attended Board and committee meetings and interviewed each director and the Company Secretary individually.

Over the last year we have been implementing the recommendations of that review, with the aim of ensuring the more efficient and effective operation of the Board and its functions, focusing on succession planning, Board composition and the use of Board time.

WPP is a large, multidisciplinary and geographically dispersed organisation, doing business in complex and fast-changing markets. To complement the excellent reporting and presentations the Board already receives from the management team, we have made changes to the Board agenda to ensure there is always sufficient time for discussion and debate of the most pressing topics.

We have sharpened the Board’s focus on key risks, not least data security and regulation, as the danger of breaches, cyber attacks, cyber fraud and potential infringements of data protection laws become ever more present for all businesses.

The task of evaluating Board effectiveness is a continuous one and this year our senior independent director, Nicole Seligman, has led the Board evaluation, building on the recommendations of the external review to ensure the positive momentum is maintained.

In 2016, we welcomed Tarek Farahat to the Board as a non-executive director, following the tragic loss of our colleague Roger Agnelli. In Tarek, we found someone who shared Roger’s passion for, and experience in, the Latin American markets, which are of course strategically important to WPP and its clients.

Tarek’s track record of running consumer-facing businesses in Latin America, the Middle East and Europe, and his board-level experience with global public companies, have already been of immense value to your Board and the Company as a whole.

At the AGM this year we say goodbye to two members of the Board: Timothy Shriver and Charlene Begley.

Tim is retiring from the Board having completed his term as a non-executive director, during which time he served as a valued member of the Compensation Committee and Nomination and Governance Committee. We have all benefited from his breadth of vision, deep insight and thoughtful engagement with the Board, and he leaves with our enduring gratitude for the contribution he has made to the fortunes of WPP over the last nine years.

Charlene has also had a hugely positive impact during her three years with WPP and the support she has provided as a valued member of the Audit Committee and Nomination and Governance Committee and on the IT Transformation project. She has the Board’s very best wishes as she leaves due to timing conflicts on her other US board commitments.

Charlene’s departure means the proportion of women on the Board will fall temporarily after the AGM from the current 29%. We intend to restore – and if possible improve upon – that statistic with coming appointments.

While we still have work to do to achieve greater gender balance on the Board, in terms of the spread of nationalities WPP already has a diverse line-up of directors – with eight different nationalities represented. For a global company like WPP, with interests in mature and fast-growing markets around the world, the international perspective this affords is vital.

During 2016, the Compensation Committee, led by Sir John Hood, has carefully considered the renewal of the Directors’ Compensation Policy for submission to share owners for approval at the AGM. This has been a complex task that has taken into account the corporate governance policies and guidance provided by our share owners and the need to appropriately reward executives. The policy that we are submitting for your approval does respond to concerns expressed about executive compensation levels in the UK, in that it presents a significant diminution of the previous policy, while attempting to provide an attractive proposition for current and future executives.

The quality of our management team is underlined by WPP’s financial performance and also by the external recognition it receives.

At the head of our operating companies, many of them multinational corporations in their own right, the Group has an enviable collection of highly accomplished and capable business leaders a number of whom have seamlessly succeeded to their global CEO roles during 2016. As ever they give their own reports on the progress of their businesses within these pages. I encourage you to read them all.

As I said in last year’s report, succession planning (for all major companies, not just WPP) must consider two scenarios: a planned process of transition to new leadership over time; and an unforeseen, more sudden change due to circumstances beyond our control.

Whether it happens in the near or distant future, when Sir Martin leaves his role as chief executive we will have an exceptional team of potential candidates on the bench. This team comprises not only those who report directly to Sir Martin but also many who currently occupy the senior tier below.

Our succession planning process, which has always been rigorous, has become even more focused and detailed over the last year. As part of our continuous assessment of those individuals who might one day become chief executive of the Group, we have invited a number of leaders within WPP companies to present to the Board and attend Board meetings. This exercise gives me greater confidence than ever in the strength of our people and their potential to succeed at the very top.

This internal pool is, of course, maintained alongside a constantly refined list of external candidates.

The outstanding nature of the executives the Board meets regularly leads me to believe that they are, in turn, developing leaders of similar character and ability within their own companies. This pipeline of talent is essential for the ongoing prosperity of your Company – an organisation built on human ingenuity and expertise.

WPP’s record-breaking run is the product of hard work by 205,000 dedicated people worldwide (including associates and investments). On behalf of the Board and the Group’s share owners I offer them our heartfelt thanks.

Roberto Quarta
19 April 2017

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 and attendance during 2016

Dear share owner

Committee responsibilities and how they were discharged in 2016

• succession planning for the CEO and senior management and review of tenure and independence of the non-executive directors;
• the appointment of a non-executive director with Latin American experience following the death of Roger Agnelli and a non-executive director with financial experience to join the Audit Committee;
• Board evaluation; and
• the selection of an external search firm to work with the committee and Board on the selection of non-executive directors.

Succession planning

I have had extensive discussions with share owners on the renewal of the compensation policy and the issue of succession and sought to respond to 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.

Following the recommendations of the external Board evaluation, the Board has made progress in assessing the internal and external candidates for CEO and CFO succession and considering internal candidate development and skill gaps. During 2016, 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 both formally and informally 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 engaged an external search firm to work with the committee and Board to identify suitable and diverse directors in the context of the strategic development of the Group, which include business-specific and digital or data analytics expertise, back office integration, relevant financial experience and UK governance experience. The external search firm has no other connection with the Group.

New non-executive director

The Board announced the appointment of Tarek Farahat as a non-executive director on 11 October 2016, following the recommendation of the committee which had been assisted in the search process by the external search firm. Mr Farahat is the Global President for Marketing and Innovation and a Director of JBS S.A. and prior to that spent 26 years at Procter & Gamble in a range of marketing and management roles working across Europe, the Middle East, Africa and Latin America including as head of their operations in Brazil for six years. Mr Farahat’s considerable knowledge of Latin America and his proven track record of running consumer-focused businesses in that market as well as the Middle East and Europe together with his relevant financial and global public company board experience will enhance our Board effectiveness. Mr Farahat was appointed to the Audit Committee on 24 February 2017 after an initial period of familiarisation with the Group.

Committee composition

Pursuant to our non-executive director tenure policy, Tim Shriver will retire at this year’s AGM having served on the Board and the Compensation Committee since August 2007. Charlene Begley will also retire at this year’s AGM due to the pressure of her other US commitments. Subject to their appointment and reappointment at the AGM and following the retirement of Tim Shriver and Charlene Begley, the composition of our three main committees will be as follows:

The senior independent director, Nicole Seligman, customarily attends all Board committee meetings.

Board and committee evaluation

The annual evaluation of the Board’s and all committees’ effectiveness has been conducted internally by the senior independent director following the externally facilitated evaluation by Dr Tracy Long of Boardroom Review Limited which commenced in 2015 and was concluded in 2016.

Each director completed a confidential questionnaire and then held separate conversations with the senior independent director considering the effectiveness of the Board and its committees and an assessment of my performance. The discussions also considered the progress made by the Board in implementing the recommendations of the external evaluation. The results of the evaluation will be considered in the 2016 Sustainability Report to be published in June 2017.

Board diversity

The Board confirms its commitment to diversity, including gender at all levels of the Group as well as the Board. The Board’s policy on diversity commits WPP to increasing diversity across its subsidiaries and supports the development and promotion of all talented individuals. As at 31 December 2016, women comprised 29% of the WPP Board and 33% of non-executive directors, including the senior independent director, and represented eight different nationalities with a broad spectrum of skills, backgrounds and experience. The Board intends to restore and, if possible, improve upon the diverse nature of the Board following Charlene Begley’s retirement at this years AGM.

Corporate Governance

During the year, the Board was briefed on regulatory and corporate governance developments. This principally included the UK Corporate Governance Code guidance on audit committees and the changes to the auditor independence rules, the implementation of the Market Abuse Regulation and an external report on the role of Nomination Committees.

Sustainability

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 2016. A more detailed review of our sustainability performance and activities can be read in the Sustainability review and in our 2016/2017 Sustainability Report and Pro bono book to be published in June 2017.

Terms of reference

The committee’s terms of reference, which are reviewed with the Board annually and most recently in April 2016, are on the Company’s website at wpp.com/investor.

Roberto Quarta
19 April 2017

Review of the Audit Committee

Report by Jacques Aigrain
Chairman of the Audit Committee

¹ Roger Agnelli tragically died on 19 March 2016.

Dear share owner

W

e held seven meetings during the year, which were attended by Deloitte LLP, the Company’s external auditor, the Company’s chairman, the senior independent director, the Group finance director, the director of internal audit, the Group chief counsel, the Group chief accountant and the Company Secretary. The committee also held separate private meetings with the external auditor, the director of internal audit and the Group chief accountant.

Committee responsibilities and how they were discharged in 2016

The main matters we dealt with during 2016 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 and reviewing the risk map and framework for presentation to the Board;
• 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 shared services 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 members of this committee examined whether the Annual Report and Accounts for 2016 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 2016 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 2016 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 2016;
• the judgements made in determining the gain on investment made in 2016 on Imagina. 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 judgements made in respect of the release of provisions related to other media income. The committee considered the testing undertaken by Deloitte and information from management to support the change in approach and agreed the change where supported is appropriate;
• the valuations of non-controlled investments and listed associates, 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.

External audit

Deloitte have been WPP’s auditors since 2002. The lead partner rotates every five years and the latest rotation took effect during 2015. In 2016, 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 2016 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 2016 Audit Quality Review on the audit file of WPP for the year ended 31 December 2015 as part of their 2016 review cycle. 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 2016 Audit Quality Review on the audit file of WPP for the year ended 31 December 2015 as part of their 2016 review cycle. The committee recommends the reappointment of Deloitte at the AGM on 7 June 2017.

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.

Internal audit

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.

Non-audit fees

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. Further review in 2016 has resulted in a prohibition on tax services being provided by Deloitte in the EU and a general default to an alternative provider elsewhere subject to adherence to regulations. 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 2016 is shown in note 3 of the financial statements PDF (1.07MB).

Committee evaluation

The committee and its members were formally assessed by the Nomination and Governance Committee as part of the review of committee composition in 2016 and as part of the evaluation process described above 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 were reviewed and updated in October 2016 and can be viewed on the Company’s website at wpp.com/investor.

Committee membership

Tarek Farahat was appointed to the committee on 24 February 2017 and brings not only relevant financial and global public company experience but also sector and operational experience across many of the markets in which the Group operates with particular experience in Latin America. I look forward to his contribution to the committee and would like to thank Charlene Begley for her hard work as a member of the committee, as she will be retiring at the AGM. I would also like to thank all of my colleagues on the committee, the parent company executives and external advisors for their endeavours in 2016.

Jacques Aigrain
19 April 2017