CORPORATE GOVERNANCE STATEMENT

Introduction

The Board is responsible for the Group’s system of corporate governance and is ultimately accountable for the Group’s activities, strategy and financial performance. The Board is dedicated to upholding and achieving good standards of corporate governance, integrity and business ethics for all activities.

The Board continues to be committed to maintaining the Group’s operations in accordance with the highest standards of corporate governance as set out in ‘The UK Corporate Governance Code’ issued in June 2008 and has complied with it throughout the year except for the following:

• Paragraph A.2.1. The roles of Chairman and Chief Executive were exercised by R Holt until 24 November 2010. On 25 November 2010, D J Miles was appointed Chief Executive, at which point the Group complied with this paragraph; and
• Paragraph A.3.1. One out of six Non‑Executive Directors, M A Macario, has served as a Non‑Executive Director for more than nine years. Mr Macario will not be standing for re‑election at the AGM in June 2011, at which point the Group will be compliant with this paragraph. In addition R B Pomphrett had served for more than nine years as a Non‑Executive Director until June 2010.

The Board of Directors

As at 31 December 2010, the Board of Directors was made up of ten members consisting of four Executive Directors and six Non‑Executive Directors.

The Board’s prime objective is to ensure on‑going commercial and financial success of the Group. At the beginning of the year, the roles of Chairman and Chief Executive were exercised by R Holt. On 25 November 2011, D J Miles was appointed Chief Executive. The roles of Chairman and Chief Executive are now separate and are clearly defined with the division of responsibilities agreed by the Board. R Holt continues to fulfil the role of Chairman and, in line with best practice, ensures the effectiveness of the Board. D J Miles leads and manages the Group as Chief Executive. A central part of his role includes recommending and implementing key strategies, communicating to shareholders and managing the business operations.

Each of the six Non‑Executive Directors are considered by the Board to be independent of management and free from any relationship which might materially interfere with the exercise of independent judgement. The Board does not consider the Non‑Executive Directors’ shareholdings or the number of years served in the case of M A Macario to impinge on his independence and he continues to represent the Non‑Executive Directors as Senior Independent Director. The Non‑Executive Directors provide a strong independent element to the Board and bring experience at a senior level of business operations and strategy, constructively challenging and helping develop proposals on strategy. A summary of the terms and conditions of appointment of the Non‑Executive Directors is available on request from the Company Secretary.

The Board has been mindful as to the need to position the business for its next stage of growth and, alongside this, reinforce the Group’s corporate governance to better reflect its Main List status. The following changes to the Group’s Board have taken place in the last year:

• D Marston was appointed to the Board and the Audit Committee at the AGM in June 2010. She has an excellent background in finance, banking and the public sector. It is envisaged that D Marston will be appointed Chair of the Audit Committee on the retirement of M A Macario; and
• R Macnamara was appointed to the Board, the Remuneration Committee, the Nomination Committee and Audit Committee at the AGM in June 2010. He has an excellent background in finance and public company management. R Macnamara chairs the Nomination Committee.

The following changes to the Group’s Board will take place:

• M A Macario, who joined the Board in 1996, will not be seeking re‑election at the AGM to be held in June 2011. He is currently Chair of the Audit Committee and is the Senior Independent Director; and
• the role of Senior Independent Director will be assumed by P F Dicks on the retirement of M A Macario.

The biographical details of the Directors are shown on the Board of Directors page. These indicate the high level and range of business experience which enables the Group to be managed effectively. Their mix of skills and business experience is a major contribution to the proper functioning of the Board and its Committees, ensuring that matters are fully debated.

External appointments and commitments

The Chairman, R Holt, is also Chairman of Green Compliance plc.

Board responsibility

The Board maintains and regularly reviews a full list of matters and decisions which are reserved to, and can only be approved by, the Board. These are reviewed annually and include but are not limited to:

• Group strategy and operating plans;
• corporate governance and risk management;
• compliance with laws, regulations and the Company’s code of business conduct;
• financing and treasury, including the approval of budgets and major capital acquisitions;
• appointment, termination and remuneration of Directors and the Company Secretary;
• financial reporting and audit, including interim and full‑year results announcements and dividends;
• approving significant acquisitions, disposals and new business start‑ups;
• ethics; and
• employee benefits including pensions and share‑based payments.

Evaluation of Board performance

The Board undertakes formal evaluation of its own performance and the Board Committees assess their respective roles, performance and terms of reference and report accordingly to the Board. The Board assesses the reviews of each Committee. The Chairman carried out an evaluation of the Board in the summer of 2010 by holding individual meetings with each Director to discuss their views and to canvass suggestions.

The performance evaluation process included: a review of the areas of Board responsibility; the structure and composition of the Board and its Committees and the performance of the Committees; the quantity, quality and scope of information provided to the Board; the content of Board meetings and presentations to meetings; and the openness of communications between the Board members and Executive management. The Board members concluded that appropriate actions had been identified to address areas that could be improved and that, overall, the Board and its Committees continued to operate effectively.

The performance of the Chairman was reviewed separately in a process led by the Senior Independent Director.

Following the performance evaluation of individual Directors, the Chairman has confirmed that the Non‑Executive Directors standing for re‑election at this year’s AGM continue to perform effectively and demonstrate commitment to their roles. In particular the Board is strongly of the opinion that by their actions and conduct they demonstrate their independence notwithstanding the number of years they have served as Directors of the Company. It is the Board’s intention to continue to annually review its performance and that of its Committees and individual Directors. A decision is taken each year on the performance evaluation process to be used.

Board meetings

The Board meets regularly throughout the year as well as on an ad hoc basis, as required by time critical business needs. The Board receives detailed financial information and regular presentations from Executives on Mears’ business performance. Directors are supplied with an agenda and supporting papers for all Board meetings on a timely basis along with minutes of previous Board Committee meetings. This enables the Directors to make informed decisions on corporate and business issues under consideration. When Directors are unable to attend a meeting, they are advised of the matters to be discussed and given an opportunity to make their views known to the Chairman prior to the meeting.

During the year, six scheduled Board meetings were held.

The Non‑Executive Directors meet independently without the Chairman present, and also meet with the Chairman independently of management, on a regular basis. The Non‑Executive Directors also independently meet each of the Executive Directors formally twice a year.

All Directors have access to the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. Any Director, on appointment and throughout their service, receives an induction and is entitled to receive any training which is considered necessary to fulfil their responsibilities effectively.

The Directors delegate responsibilities for the day‑to‑day operational and financial management of the Group to the Senior Management Team.

Senior Management Team

The Senior Management Team, which comprises Senior Executives across each of the Group’s operational divisions and support functions, is the principal forum for directing the operational and financial business of the Group and for delivering the strategy set by the Board. All Executive Directors are present at the bi‑monthly meetings; all Non‑Executive Directors are invited to attend.

Board Committees

The Board has established three Committees, each with clearly defined terms of reference, procedures, responsibilities and powers. The terms of reference of the Committees are available from the Company Secretary.

The Chairman of each Committee provides a report of any meeting of that Committee at the next Board meeting. Each Committee includes Non‑Executive Directors, as required by the UK Corporate Governance Code 2008.

The Chairmen of each Committee are present at the AGM to answer questions from shareholders.

Through the Audit Committee, the Directors ensure the integrity of financial information, the effectiveness of the financial controls and the internal control and risk management systems. The Nomination Committee recommends the appointment of Board Directors and has responsibility for evaluating the balance of the Board and for succession planning at Board level. The Remuneration Committee sets the remuneration policy for Executive Directors and determines their individual remuneration arrangements.

Meeting attendance

All Directors are encouraged to attend all Board meetings and meetings of Committees of which they are members.

Directors’ attendance at Board meetings and Committee meetings during 2010 is shown on the table below.

Audit Committee

Since 9 June 2010, the Audit Committee has comprised D Marston, R Macnamara and, its Chairman, M A Macario. Prior to 9 June 2010, the Audit Committee comprised R B Pomphrett, P F Dicks and M A Macario. The presence of other Senior Executives from the Group may be requested.

The Audit Committee is responsible for monitoring and reviewing:

• the integrity of the interim and annual financial statements, including a review of the significant financial reporting judgements contained in them;
• the effectiveness of the Group’s internal control and risk management and control over financial reporting;
• internal audit plans, including the review of significant findings, management action plans and timeliness of resolution;
• the Group’s overall approach to ensuring compliance with laws, regulations and Company policies in areas of risk, accounting standards and generally accepted accounting principles;
• the Group’s relationship with the external auditor, including their independence and management’s response to any major external audit recommendations;
• the Group’s policy in relation to the provision of non‑audit services by the auditor;
• the appointment and review of the Group Risk Officer;
• the effectiveness of the Group’s internal audit function; and
• the preservation of good financial practices throughout the Group.

In addition, the fees and objectivity of the Group’s auditor are considered by the Committee.

During the year, the Audit Committee received detailed presentations from the Group’s auditor and reviewed the findings of the external auditor from its audit of the annual financial statements.

The Audit Committee is committed to ensuring the independence and objectivity of the external auditor. During the year the Committee assessed the qualifications, expertise, resources and independence of the external auditor, as well as its on-going effectiveness and considered the audit process on the basis of meetings and an internal review with finance, audit staff and other senior management. In reviewing the independence of the external auditor, the Audit Committee considered a number of factors, including: the standing, experience and tenure of the external audit partner; the nature and level of services provided by the external auditor; and confirmation from the external auditor that it has complied with relevant UK independence standards. This is particularly important in light of the tax compliance and advice being performed by the same firm. This is safeguarded through a review of the level of non‑audit work which is given to the audit firm. The Committee also reviews the term of office of the external auditor.

The Audit Committee has monitored and reviewed the effectiveness of the internal systems and controls in place, taking into account the key business and financial risks and mitigation towards these.

The Audit Committee considers the need for an internal audit function annually. After due consideration the Committee has recommended to the Board that a formal internal audit function is not considered necessary due to the regular involvement of central functions such as business analysts and the regional finance team in branch activities. This position will be re‑considered during 2011. The Committee has recommended to the Board that a small independent team continues to investigate any allegations brought to its attention through the Group’s whistleblowing procedure. This team operated throughout 2010 and remains in place.

Nomination Committee

Since 9 June 2010, the Nomination Committee has comprised P F Dicks, M A Macario and, its Chairman, R Macnamara. Prior to 9 June 2010, the Nomination Committee comprised R Holt, R B Pomphrett, M A Macario, and its Chairman, P F Dicks.

The Committee meets at least once a year and is responsible for keeping under review the composition of the Board and succession to it and succession planning for senior management positions within the Group. It makes recommendations to the Board concerning appointments to the Board, whether of Executive or Non‑Executive Directors, having regard to the balance and structure of the Board and the required blend of skills and experience. The Committee also makes recommendations to the Board concerning the re‑appointment of any Non‑Executive Director at the conclusion of his/her specified term and the re‑election of any Director by shareholders under the retirement provisions of the Company’s Articles of Association.

D J Miles was appointed as Chief Executive during the year after a rigorous process of succession planning which has involved discussions with major shareholders and customers. The appointment was approved by the Nomination Committee. The process has been underway internally for some time resulting in a stable and smooth transition.

Remuneration Committee

Since 9 June 2010, the Remuneration Committee has comprised M A Macario, R Macnamara and, its Chairman, P F Dicks. Prior to 9 June 2010, the Remuneration Committee comprised M A Macario, P F Dicks and, its Chairman, R B Pomphrett.

The Committee meets twice a year and is responsible for determining and agreeing with the Board the broad remuneration policy for:

• the Chairman, the Executive Directors and senior management; and
• the Executive Directors’ remuneration and other benefits and terms of employment, including performance related bonuses and share options.

No Director is involved in determining his own remuneration.

The Committee also approves the service agreements of each Executive Director, including termination arrangements.

All Directors are encouraged to attend all Board meetings and meetings of Committees of which they are members.

Directors’ attendance at Board meetings and Committee meetings during 2010 is shown in the following table:

	Board			Audit Committee			Nomination Committee			Remuneration Committee
Number of meetings	Potential	Actual		Potential	Actual		Potential	Actual		Potential	Actual
R Holt	6	6		—	—		—	—		—	—
D J Miles	6	6		—	—		—	—		—	—
A C M Smith	6	6		—	—		—	—		—	—
A Long	6	6		—	—		—	—		—	—
M G Rogers	6	6		—	—		—	—		—	—
M A Macario	6	6		3	3		1	1		3	3
R B Pomphrett*	2	2		1	1		1	1		1	1
P F Dicks	6	6		1	1		1	1		3	3
D L Hosein	6	6		—	—		—	—		—	—
D Marston*	4	4		2	2		—	—		—	—
R Macnamara*	4	4		2	2		—	—		2	2

* D Marston and R Macnamara were appointed to the Board and R B Pomphrett did not seek re‑election at the AGM on 9 June 2010.

Share capital

At 31 December 2010 the structure of the Company’s capital is as follows:

	Issued Number	Nominal value per share p	Total £'000	Percentage of issued ordinary shared %
Ordinary shares	84,815,470	1	848	100

Rights and obligations

Dividends

The 1p ordinary shares carry the right to discretionary dividends determined by the Company’s Directors.

Voting rights

The 1p ordinary shares carry the right to one vote per share.

Restrictions on transfer of shareholdings

There are no restrictions on the transfer of the 1p ordinary shares in issue.

Special control rights

None of the shares in issue contain any special control rights.

Share schemes

At 31 December 2010, 7,502,411 options over 1p ordinary shares were in place. In addition, 2,500,000 options vested in November 2010 under the terms of the Special Incentive Plan approved by shareholders on 16 November 2007. Upon exercise the new 1p ordinary shares have equal rights with regards to the control of the Company as the 1p ordinary shares already in issue. Further detail on these options is available in note 6 to the accounts.

The Company and its shareholders

The Group places a great deal of importance on communication with its shareholders. The Board is committed to maintaining an on-going dialogue with its shareholders through the provision of regular Interim and Annual Reports and regular trading reports.

There is regular dialogue with individual institutional shareholders as well as general presentations after the interim and preliminary results. Throughout the year the Group arranged a number of site visits for shareholders and other City commentators with the aim of providing them with increased exposure to our operations and management.

The principal methods of communication with private investors remain the Annual Report and Accounts, the interim statement, the quarterly newsletters and the Group’s website (www.mearsgroup.co.uk), where the Group highlights the latest key business developments.

Internal control and risk management

The UK Corporate Governance Code requires that the Directors review the effectiveness of the Group’s system of internal control. This extends the Directors’ review to cover all material controls, including operational, compliance and financial controls and risk management systems. The Directors are satisfied that procedures are in place to ensure that the Group complies with the Turnbull Committee guidance published by the Institute of Chartered Accountants in England and Wales and that the procedures have been applied during the year.

The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. The Board has delegated some of these responsibilities to the Audit Committee who has reviewed the effectiveness of the system of internal control and ensured that any remedial action has or is being taken on any identified weaknesses. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. It includes all controls including financial, operational and compliance controls and risk management procedures.

The Board confirms that the Group has in place an on-going process for identifying, evaluating and managing the significant risks faced by the Group. The Group endeavours to ensure that the appropriate controls, systems and training are in place and has established procedures for all business units to operate appropriate and effective risk management.

The processes used to assess the effectiveness of the internal control systems are on-going, allowing a cumulative assessment to be made, and include the following:

• delegation of day‑to‑day management to operational management within clearly defined systems of control, including:
  • the identification of levels of authority within clearly identified organisational reporting structures;
  • the identification and appraisal of financial risks both formally, within the annual process of preparing business plans and budgets, and informally, through close monitoring of operations;
  • a comprehensive financial reporting system within which actual results are compared with approved budgets, quarterly re‑forecasts and previous years’ figures on a monthly basis and reviewed at both local and Group level; and
  • an investment evaluation procedure to ensure an appropriate level of approval for all capital and revenue expenditure;
• discussion and approval by the Board of the Group’s strategic directions, plans and objectives and the risks to achieving them, combined with regular reviews by management of the risks to achieving objectives and actions being taken to mitigate them;
• review and approval by the Board of annual budgets, combined with regular operational and financial reviews of performance against budget, prior year results and regular forecasts by management and the Board;
• the review and approval of all bids, acquisitions and capital expenditure within the Group;
• regular reviews by the Board and Audit Committee of identified fraudulent activity and actions being taken to remedy any control weaknesses;
• regular reviews by management and the Audit Committee of the scope and results of internal and external audit work across the Group and the implementation of recommendations; and
• consideration by the Board and by the Audit Committee of the major risks facing the Group and of the procedures in place to manage them and to ensure controls react to changes in the Group’s overall risk profile. These include health and safety, legal compliance, quality assurance, insurance and security and reputational, social, ethical and environmental risks.

The Board has reviewed these procedures and considers them appropriate given the nature of the Group’s operations. The system of internal control and risk management is embedded into the operations of the Group and the actions taken to mitigate any weaknesses are care-servicesfully monitored.

The key controls in place are:

• a defined organisational structure and an appropriate level of delegated responsibility to operational management;
• authorisation limits for financial and non‑financial transactions;
• written operational procedures;
• a robust system of financial budgeting and forecasting;
• a robust system of financial reporting with actual results compared to budget and forecast results; and
• a regular reporting of operational performance and risks to the Board.

Additionally, in line with The UK Corporate Governance Code, the Group has arranged appropriate insurance cover in respect of legal action against its Directors.

This report was approved by the Board and has been signed on its behalf by:

M A MACARIO

SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
15 APRIL 2011