Leadership

Effectiveness

Relations with shareholders

Accountability

Remuneration

Code principle –Leadership

Introduction by Dr John McAdam

There is renewed focus on how boards discharge their duties. I hope from reading our strategic report and this corporate governance report, it will provide you with an understanding of how we operate our business in accordance with our current strategic objectives and how we are constantly planning for the future needs of our customers and other stakeholders.

Overview of the board's responsibilities

  • Sets the strategy of the group, ensuring the long-term success of the group for customers, investors and wider stakeholders and in creating shareholder value;
  • Is responsible for challenging and encouraging the executive team in its interpretation and implementation of how it manages the business, and that it is doing so in accordance with the strategic goals the board has set;
  • Has responsibility for ensuring the company's internal control systems (including financial, operational and compliance) and processes are sound and fit for purpose. See the 'accountability' section of this report for more detail;
  • Must ensure that the company has the necessary financial resources and people with the necessary skills to achieve its objectives. It also reviews managerial performance annually; and
  • Has oversight of major capital expenditure projects within UUW which exceed £150 million, and any project which materially increases the group's risk profile or is not in the ordinary course of the group's business.

Full details of the matters that the board has reserved for its own decision-making, due to their importance to the business or the working of the board, can be found on our website at unitedutilities.com/corporate-governance

Governance structure for our board and our committees

In line with the Code, the board delegates certain roles and responsibilities to its principal board committees, as shown in the diagram below. While the board retains overall responsibility, a sub-committee structure allows these committees to probe the subject matters more deeply and gain a greater understanding of the detail. The commitees then report back to the board on the matters discussed, decisions taken, and where appropriate, make recommendations to the board on matters requiring its approval. The reports of the principal board committees required by the Code can be found in other sections of the website. Minutes of the board and principal board committee meetings (with the exception of the remuneration committee) are tabled at board meetings and the chairs of each of the board committees report verbally to the board on their activities. The Chairman chairs the nomination committee; all other principal board committees are chaired by independent non-executive directors who have particular skills or interests in the activities of those committees.

The executive team is chaired by the CEO, and its members are the senior managers who have a direct reporting line to the CEO. Our executive team meets monthly; it is responsible for the day-to-day running of the business and other operational matters and implementing the strategies that the board has set. Short biographies of the executive team can be found on our website at corporate.unitedutilities.com/united-utilities-executive-team.

The diagram shown below also shows the principal management committees and a brief description of their roles. These committees enable senior management to understand and, if necessary, challenge the business in its interpretation of the implementation of the strategies the board has set. The board received reports from the CEO and CFO at every scheduled board meeting, providing the board with an updated overview of the business and its financial performance and position. Operational updates are also provided to board meetings by the COO.

Governance structure of the board and its principal committees and the principal management committees

Group Board

Chair: Dr John McAdam

Principal board committees

Audit committee

Chair: Brian May

Remuneration committee

Chair: Sara Weller

Nomination committee

Chair: Dr John McAdam

Corporate responsibility committee

Chair: Stephen Carter

Treasury committee

Chair: Brian May

The committee considers and approves borrowing, leasing, bonding and other banking facilities within limits set by the board. The CFO and treasurer are also members. Some powers are sub-delegated, within certain limits, to the CFO and treasurer.

Chief Executive Officer

Steve Mogford

Principal management committees

Executive team

Chair: Steve Mogford, CEO

This forum is responsible for implementing the board's strategy and the day-to-day operation of running the business and the CEO will cascade decisions made by the board to the business via this forum.

Group audit and risk board

Chair: Steve Mogford, CEO

Quarterly business review

Chair: Steve Mogford, CEO

This forum is responsible for the quarterly review of operational and financial performance

Political and regulatory steering group

Chair: Gaynor Kenyon, corporate affairs director

This forum is responsible for discussing political and regulatory issues affecting the company, where any 'horizon scanning' issues are raised and business responses to consultations are agreed.

Capital investment committee

Chair: Steve Mogford, CEO

The committee is responsible for authoring expenditure relating to the capital investement programme.

Key

The best service to customers

At the lowest sustainable cost

In a responsible manner

Summary of board activity in 2017/18

Cross referenceLink to strategic objectives
Leadership and employees
  • Review of health, safety and wellbeing activities and consideration of health and safety incidents of employees and contractors reinforcing the company's belief that 'nothing we do is worth getting hurt for' and an update on the progress of developing and implementing an improved health and safety culture within the business 'home safe and well';
See here
  • Considered board succession planning and the appointment of Paulette Rowe as an independent non-executive director and Steve Fraser, Chief Operating Officer, to the board as an executive director;
See here
  • Monitored progress on key aspects of the employee succession and development plans, identifying leadership potential at all levels, developing our employer brand and our aspiration for a multi-generational workforce that is representative of our customer base building on the strong progress already made in the apprentice and graduate programmes;
See here
  • Reviewed and discussed executive succession plans and the needs of the business to develop talented employees in the senior leadership team in preparation for the business challenges anticipated in the next asset management period;
See here
  • Discussed the results of the annual employee voice and engagement survey;
See here
  • Reviewed and updated the board diversity policy; and
See here
  • Approved the extension of the all employee share incentive scheme for a further ten years and updated the scheme rules to reflect legislative changes.
Strategy
  • Reviewed the group's corporate responsibility activities focusing on reputation management, particularly in our communications with stakeholders;
See here
  • Received regular updates at each meeting of items with strategic component, such as emerging changes to regulation, major capital expenditure and business structuring decisions;
  • Held the annual full-day strategy session debating and discussing the context of the next price review, the key issues to be addressed and considered the expectations of our key stakeholders;
See here
  • Approved the group's policy and approach on human rights; and
See here
  • Discussed the potential Renationalisation of the water sector.
See here
Governance
  • Reviewed and debated the risk profile of the group, and in particular the principal risks and our risk appetite, including a review of the most significant operational risks;
See here
  • Reviewed the effectiveness of the risk management systems, including financial, operational and compliance controls and reviewed the effectiveness of the internal control systems;
See here
  • Reviewed and discussed developments in cyber crime and the activities undertaken to enhance the effectiveness of the group's security controls and work with various government agencies and a number of other water companies to define cyber security guiding principles for use across the industry;
See here
  • Reviewed the terms of reference for the audit, remuneration, treasury and corporate responsibility committees and received post-meeting reports from the chairs of each committee summarising discussions and actions;
  • Reviewed biannual updates on changes and developments in corporate governance and the implementation of any changes required;
See here
  • Reviewed and discussed the external evaluation of the board, its committees and individual directors and conflicts of interest;
See here
  • Reviewed the performance of the external auditor and recommendation for reappointment; and
See here
  • Reviewed the approach and progress of work to identify areas where there is any risk of modern slavery occurring in our supply chain and approval of the 2017/18 slavery and human trafficking statement.
See here
United Utilities Water Limited (UUW) regulated business and its stakeholders
  • Reviewed the progress with the implementation of the lessons learnt and recommendations of the internal investigation undertaken by Mark Clare, senior independent director, in relation to the August 2015 Lancashire water quality incident and the outcome of the subsequent prosecution by the DWI in September 2017;
See here
  • Monitored progress of the embedding of the customer experience programme to improve customer service including new initiatives such as 'Priority Services' and 'Moving Home', improved training for employees handling customer calls and systems improvements and resulting improvements as demonstrated by our scores against Ofwat's qualitative Service Incentive Mechanism (SIM); and
See here
  • Received regular updates on the group's preparedness and plans for the 2020–25 regulatory period and the preparation of UUW's business plan due for submission to Ofwat in September 2018.
See here
Other group business
  • Reviewed progress on the group's renewable energy generation capabilities and opportunities for expansion and innovation including developing our plans around battery storage of power for use overnight when solar panels are not generating; and
See here
  • Reviewed progress of the group's joint venture Water Plus and approved additional working capital and increased credit support as matched by joint venture partner Severn Trent.
See here
Shareholder relations
  • Received and discussed a presentation by Rothschild Investor Advisory on investors' views and perceptions of the group in relation to amongst other things: strategy; the group's unique selling proposition; dividend policy; and how the company compares with other listed water and wastewater companies; and
See here
  • Regularly received and discussed feedback from roadshows, presentations and face-to-face meetings between investors and the CEO and/or the CFO and other communications received from large investors.
See here
Financial
  • Reviewed the 2017/20 business plan and approved the 2018/19 budget;
  • Reviewed and approved the half and full-year results and associated announcements;
  • Reviewed and approved the 2017/18 company's UK tax strategy;
See here
  • Reviewed the potential effects of changes to inflation on the water sector and proposals from Ofwat to transition from the Retail Price Index (RPI) to the Consumer Prices Index including owner occupiers' housing costs (CPIH) as the primary means of indexation in the next asset management period;
See here
  • Reviewed and approved the company's treasury policy, the group's funding requirements for the year and the potential sources to meeting these funding requirements and managing the group's interest rate and other market risk exposures including the impact of Brexit;
See here
  • Reviewed progress with material litigation involving the group; and
See here
  • Reviewed, discussed and approved proposals in relation to pensions in general and specifically the United Utilities defined benefit pension scheme and related discussions with the trade unions.
See here

Key:

The best service to customers

At the lowest sustainable cost

In a responsible manner

Attendance at board and committee meetings

Eight scheduled board meetings were planned and held during the year (2017: eight). A number of other board meetings and telephone conferences were also held during the year, as the need arose. The table below shows the actual number of scheduled meetings attended and the maximum number of scheduled meetings which the directors could have attended. Only in exceptional circumstances would directors not attend board and committee meetings. Similarly, every effort is made to attend ad hoc meetings either in person or via the use of video or telephone conferencing facilities if needs be. None of our non-executive directors have raised concerns over the time commitment required of them to fulfil their duties.

On the evening before most scheduled board meetings all the non-executive directors meet either by themselves, or together with just the CEO, or with the entire board and the company secretary, and this time is usefully spent enabling board colleagues to share views and consider issues impacting the company. Time together also helps to build relationships on a personal level, which contributes to better relationships and decision-making around the board table.

The board table

Chairman

Executive director

Senior independent non-executive director

Independent non-executive director

Company secretary

Board
meetings
Audit
committee
Remuneration
committee
Nomination committeeCorporate
responsibility
committee
Treasury
committee
Dr John McAdam8/83/3
Steve Mogford8/83/3
Russ Houlden8/83/3
Steve Fraser(1)4/4
Stephen Carter7(2)/84/42(2)/33/3
Mark Clare8/84/43/3
Alison Goligher8/81(3)/14/42/23/3
Brian May8/84/44/43/33/3
Paulette Rowe(4)5/53/30(5)/1
Sara Weller8/84/43/3

Actual number of meetings attended/maximum number of scheduled meetings which the directors could have attended during 2017/18.

  1. Steve Fraser was appointed on 1 August 2017.
  2. Stephen Carter was unable to attend a meeting of the board and the nomination committee due to a conflicting commitment.
  3. Alison Goligher relinquished her membership of the audit committee on the appointment of Paulette Rowe as a member of the committee.
  4. Paulette Rowe was appointed on 1 July 2017.
  5. Paulette Rowe was unable to attend a meeting of the nomination committee due to a conflicting commitment.

Code principle – Effectiveness

Introduction by Dr John McAdam

External evaluation provides valuable insight for board members and helps prevent complacency and examine whether, as a board, we are doing the right things, with the right people and making the right decisions to promote the long-term success of the company.

Board evaluation

2017/18 being the third year since the previous external evaluation, this year's evaluation was conducted by Lintstock Consultants (Lintstock). In other years the evaluation is an internal one conducted by the company secretary and his team. Lintstock have no other connection with the company other than facilitating external evaluations in 2012 and 2015.

The 2017/18 Lintstock process consisted of discussions between Lintstock and the Chairman and the company secretary after which Lintstock issued online questionnaires to board members assessing: the performance of the board; each of its principal committees; the Chairman and each of the individual directors. In addition to board members, other members of the executive team who regularly attend and support the various committee meetings were asked to complete the same questionnaires where applicable.

Lintstock analysed the results, which were reviewed by the company secretary, and were then discussed with the Chairman and the chair of the relevant committee. Thereafter they were discussed at a meeting of the relevant committee; and then presented to the board. The Chairman reviewed the performance of the individual directors. Mark Clare, as the senior independent director, and after gauging the views of the other non-executive directors, led the review of the Chairman's performance.

A summary of Lintstock's analysis of the 2017/18 evaluation is as follows:

2017/18 areas of assessmentCommentary and actions
Board composition and
expertise
The composition of the board was considered to be a diverse group of high-quality non-executive and executive directors.
Board agendaThe board was well informed about the regulatory environment within which the company operates and had a good understanding of the views of investors, regulators and customers, but would benefit from more opportunities to gain greater exposure to the views of employees from across the group.
Board dynamicsThe relationship between the board and the chief executive was appropriate and board meetings were conducted in an atmosphere which encouraged equal contribution from all board members where there was candid discussion and critical thinking encouraged.
Board supportThe timeliness of the distribution of board documentation was appropriate. Executive summaries of board papers were used effectively although board packs were sometimes considered to be too lengthy. Board presentations were considered to be of good quality.
Wider strategic oversightThe involvement of the board in the development of the strategic direction of the group was considered to be appropriate. The format and content of the board strategy away day held during the year was well received with appropriate documentation circulated in advance along with conclusions captured and circulated after the event. It was felt that additional use of external experts would be beneficial.
Risk management and internal controlThe board's approach to the management of risk and to its systems of internal control were considered to be appropriate. The information received relating to risk management was rated highly with good visibility of operational and reputational risks, with further focus of the board on material risks being required.
Succession planning and human resource managementSuccession plans for the board were in place with outline timescales. Succession for executive positions was considered to be satisfactory.
CommitteesThe composition and performance of the audit, remuneration, nomination, corporate responsibility and treasury committees were considered to be appropriate, and the feedback from committee meetings by committee chairs was full and transparent and meetings chaired effectively. Specific actions identified were as follows:
  • Nomination committee: ensure the focus on senior board succession was managed proactively;
  • Remuneration committee: consider the way in which incentives should address the transition to the next asset management period;
  • Audit committee: ensure that the committee was kept abreast of reporting changes: and
  • Corporate responsibility committee: ensure that the committee contributed in the PR19 bid submission process particularly in terms of customer priorities.
Individual directorsThe individual performance of the all the directors was assessed, all the non-executive directors were considered to be independent and effective, and all directors demonstrated the expected level of commitment to their roles. The review of the Chairman's performance (led by the senior independent director) concluded he continued to demonstrate an effective and unbiased perspective notwithstanding that he would have served for over ten years as a board director by the 31 March 2018, that he fulfilled the expected commitment to the role and was an effective leader of the board. All directors would be offering themselves for reappointment/election at the 2018 AGM.

2016/17 evaluation recommendationsActions taken during 2017/18
The board would benefit from more opportunities to gain a better understanding of the views of customers and on service delivery and technical innovations for customers.The board receives regular reports from both the COO and the customer and people director at almost every meeting on activities within their business areas to improve our services for our customers, and from time to time are provided with data on the areas of our service generating the most complaints.
Allow more time for the discussion of key strategic topics at the board strategy away day.The main topic of discussion at the board strategy day held in October 2017 was the forthcoming 2019 price review submission.
Nomination committee: maintain the focus on senior board succession over the next 12 months, but also ensure that there was thought given to the skills needed around the board over the next five years.There have been three senior appointments during the year from our executive succession plan, Steve Fraser appointed to the board as COO, James Bullock appointed to the executive team as strategy and regulation director and Louise Beardmore now has a broader executive role with responsibility for human resources in addition to her customer role as our customer and people director.
Remuneration committee: consider the timetable for the review of the committee's external advisers.A review process for the committee's external advisers has been scheduled.
Audit committee: continue the focus on ensuring papers were concise.Improvements had been made to the conciseness of papers.
Corporate responsibility committee: increase the committee's engagement with customer priorities.The chair of the YourVoice panel has provided the panel's view of customer priorities to the committee and steps taken to facilitate payment by customers in lower income groups.

Board development

Board directors regularly receive updates to improve their understanding and knowledge about the business and in particular its regulatory environment. As part of the individual directors element of the board evaluation exercise (see table above), directors are asked to identify any skills or knowledge gaps they would like to address.

Consideration of environmental and social issues are fundamental to the way in which we operate as a responsible business at United Utilities; such matters are central to board discussions (see the summary of board activity in the table above). The board's approach to these matters is reflected in our strategic objective of behaving in a responsible manner, and information relating to this can be found throughout the strategic report. Board awareness of in-region environmental and social matters has also been raised during the year by the independent customer challenge group, known as 'YourVoice'. In addition to this less formal approach to board development, during the year the board also received briefings from both Slaughter and May (legal and governance matters) and KPMG (governance changes relating to reporting requirements) along with a number of other advisers.

Our non-executive directors are conscious of the need to keep themselves properly briefed and informed about current issues and to deepen their understanding of the business. During the year, the board visited the offices of Water Plus in Stoke-on-Trent to experience first hand the operational side of our activities with our joint venture partner Severn Trent in the competitive commercial sector. Board members also visited the group's offices in Warrington and had the opportunity to see the work of our Innovation Lab (read more).

Following appointment each director will have an induction programme arranged for them in order to help them gain an understanding of the business and the key issues and to provide them with information that will help them to be effective and make a contribution to board debates. Details of Paulette Rowe's induction are given in the Nomination committee section.

Values and culture

The best service for customers

At the lowest sustainable cost

In a responsible manner

Core value:

Customer focus

Everything we do will be about our customers, not us.

Core value:

Innovation

We will innovate to make our services better, safer, faster and cheaper for our customers.

Core value:

Integrity

We will make promises knowingly and keep them.

The values identified by the board (Our purpose and strategy) underpin our strategic objectives:

The United Utilities way of doing things is to behave as a responsible business and is set out in our 'Business Principles' document. A copy can be found at: www.unitedutilities.com/corporate/about-us/governance/business-principles/. During the year the board approved the group's human rights policy which can be found on our website and which also has links to other related policies including our customer data protection policy, modern slavery policy, privacy policy and our sustainable supply chain charter. We believe that the areas that are most salient to our business, and which would have the greatest negative impact on people through our activities or business relationships are: forced/child labour; health and safety and data protection and privacy.

The culture of a company was defined by the FRC* 'as a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders. These stakeholders include shareholders, employees, customers, suppliers and the wider community and environment which are affected by a company's conduct.' The board's aim is to lead by example and set the standard of behaviour we expect from our employees. The approach for board meetings is to foster an environment of trust and one that is conducive to open and frank discussions. This approach is in the best interests of our business and all our stakeholders. Furthermore, culture in its various forms/guises is treated as business as usual. Cultural indicators such as customer service, employee matters and risk management form part of the board's regular discussions and further contribute towards our objective of behaving responsibly (see the summary of board activity in the table above). Our CEO is responsible for cascading our culture and responsible behaviour throughout the business and he is supported and facilitated in this by the executive and wider management team. As part of their role, we expect our employees to live the values of customer focus, integrity and innovation (see Our purpose and strategy). More information on our values can be found on our website.

* The FRC's 'Corporate Culture and the Role of Boards' July 2016

In the table below are examples of how we aim to behave responsibly towards our different stakeholders. Further information on our stakeholder engagement can be found here:

How we behave responsibly towards our customersHow we behave responsibly towards our employeesHow we behave responsibly towards our other stakeholders (shareholders, environment, communities, and regulators)

We offer 'Priority Services' that customers can register for if they require extra support due to such things as age, ill health, disability, mental health problems, financial worries or language barriers.

Our 'Moving Home' services are available to those moving house in our region.

We are making improvements to our written communications with customers to make them easier to understand and remove technical jargon along with launching a new customer website and a mobile app.

The board has regular contact with representatives of 'YourVoice' the independent customer challenge group who provide a direct channel of customers' views to the board.

At the heart of our operations is our ethos of 'nothing we do is worth getting hurt for' , we believe the safety of our employees and contractors is paramount.
Our offering to employees includes:
  • A competitive base salary;
  • Employee benefits;
  • Family friendly HR policies that go beyond the statutory minimum;
  • The opportunity to express their views about the company in the annual employee voice survey;
  • An internal network of mental health awareness supporters; and
  • Employees are encouraged to improve their wellbeing through exercise. Corporate or reduced rate gym membership has been arranged with providers across the company's region.

The company funds an employee assistance support programme providing a confidential counselling and information service 24/7 to assist employees with personal or work-related problems that may be affecting their health, wellbeing or performance. A whistleblowing helpline is in operation (see Audit committee).
Our engagement with our wider stakeholders is business as usual through a number of specialist functions/teams such as:
  • our investor relations team provides a point of contact for equity investor queries;
  • the sustainability team champions sustainability issues with the business;
  • our stakeholder teams provide support for communities where we are undertaking major capital projects;
  • our communications teams raise awareness and respond to press and media queries;
  • our corporate affairs team provides information to public organisations;
  • teams within our business are in constant communication with our various regulators in relation to customer, economic and environmental factors; and
  • our treasury team provides a point of contact for credit investor queries.

We have made significant progress in improving the customer experience and embedding a customer service orientated culture in recent years. In the strategic report, details of the KPIs used to monitor customer service can be found. Our annual employee voice survey (see the Chairman and Chief Executive Officer's review) shows employee engagement at 79 per cent. The management team continue to focus on embedding these values in our business. Furthermore, with the implementation of our Systems Thinking approach and improving the technology deployed across our asset base during the current regulatory period, we would expect to see further improvements in the standard and efficiency of our service to our customers.

In the Stakeholder report is the stakeholder performance table which, amongst other things provides data on a number of stakeholder and cultural indicators.