Report of the Directors
Governance

Corporate Governance Report

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Effectiveness

The Composition of the Board

The board comprises the Chairman (Tim Stevenson), the Chief Executive (Neil Carson), three other executive directors (Robert MacLeod, Larry Pentz and Bill Sandford), and four independent non-executive directors (Alan Ferguson, Sir Thomas Harris, Michael Roney and Dorothy Thompson).

The board seeks to ensure that both it and its committees have the appropriate range and balance of skills, experience, knowledge and independence to enable them to discharge their respective duties and responsibilities effectively. Further information on board and committee appointments is set below under ‘Appointments to the Board and its Committees’ and in the Nomination Committee Report.

The board is of the view that it is of a size such that the requirements of the business can be met, that changes to the board’s composition and that of its committees can be managed without undue disruption, and that it is not so large as to be unwieldy. The board is also of the view that it includes an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors). The size of the board, as well as its composition, is kept under review by the Nomination Committee.

Throughout the year ended 31st March 2012, and from that date up to the publication of this annual report, at least half the board members, excluding the Chairman, were non-executive directors determined by the board to be independent (as referred to further in ‘Board Balance – Independence of the Non-Executive Directors and of the Chairman).

As announced on 22nd May 2012, Sir Thomas Harris will be retiring from the board at the close of the 2012 Annual General Meeting on 25th July 2012. Following his retirement there will be a majority of executive directors on the board pending the appointment of an additional independent non-executive director. As described in the Nomination Committee Report, the process for the appointment of an additional non-executive director has commenced.

Appointments to the Board and its Committees

The board, through the Nomination Committee, follows a formal, rigorous and transparent procedure for the selection and appointment of new directors to the board. The processes are similar for the appointment of executive and of non-executive directors.

The Nomination Committee leads the process for board appointments and makes recommendations to the board. Further information on the Nomination Committee and its work is set out in the Nomination Committee Report.

In considering board composition, the Nomination Committee assesses the range and balance of skills, experience, knowledge and independence on the board, identifies any gaps or issues, and considers any need to refresh the board. If it is determined in light of such evaluation that it is necessary to appoint a new non-executive director, the Committee prepares a description of the role and of the capabilities required for the appointment and sets objective selection criteria accordingly. In doing so it has regard for the benefits of diversity on the board, including gender diversity. This is discussed more fully under ‘Boardroom Diversity’ below.

The Committee considers any proposed recruitment in the context of the company’s strategic priorities, plans and objectives as well as the prevailing business environment. The Committee also takes into account succession plans in place (and this is discussed further under ‘Succession Planning’ below). The Committee seeks prospective board members who can make positive contributions to the board and its committees, including the capability to challenge on such matters on strategy. This is balanced with the desire to maintain board cohesiveness.

The Committee uses external search consultancies to assist in the appointment process. Appointments are ultimately made on merit against the agreed selection criteria.

The board recognises the importance of developing internal talent for board appointments as well as recruiting externally. In this regard, the company has in place various mentoring arrangements and various types and levels of management development programmes.

The board also recognises the importance of recruiting non-executive directors with the necessary technical skills and knowledge relevant to the work of its committees and who have the potential to take over as committee chairmen.

Succession Planning

The board, through the MDRC, is actively engaged in ongoing succession planning in order to ensure that plans are in place for the orderly and progressive refreshing of the board and for the identification and development of senior management with potential for board and CEC positions.

Each division and corporate function across the group prepares and maintains succession plans with the assistance of divisional and group Human Resources. The CEC rigorously reviews these plans in detail annually, with a focus on ensuring an appropriate pipeline of talented and capable individuals to fill senior roles. A key aim is to ensure broad experience and encourage cross fertilisation across the group’s divisions. The CEC also considers the identification and development of high potential individuals. The review of the plans by the CEC generally leads to further refinement and changes, resulting in the final plans which are submitted to the MDRC. The MDRC reviews succession policy, the succession plan and the management development and succession planning process each year.

Boardroom Diversity

The board believes that diversity is important for board effectiveness. The board has followed carefully the debate regarding the representation of women in the boardroom following the publication of Lord Davies’ report, ‘Women on Boards’, in February 2011 (the Davies Report).

Statement on Board Diversity

In response to the Davies Report, on 28th November 2011 the board published the following statement on board diversity. It is set out in the Investor Relations / Corporate Governance section of the company’s website.

“The board of Johnson Matthey has followed the important debate around the recommendations of Lord Davies’ review on Women on Boards and the question of boardroom diversity. We do not think quotas, for the proportion of women on the board or otherwise, are appropriate for a number of reasons. We believe all appointments should be made on merit rather than through positive discrimination. We are clear, however, that maintaining an appropriate balance around our board table through a diverse mix of skills, experience, knowledge and background is of paramount importance. Gender diversity is a significant element of this.

At present the board has one woman member in a board of nine. When we next make an appointment to the board, our brief to search consultants in the selection process as regards external candidates will be to review candidates from a variety of backgrounds and perspectives. The consultants will be asked to work to a specification which will include the strong desirability of producing a long-list of possible candidates which fully reflects the benefits of diversity, including gender diversity. Any appointment of an internal candidate, while similarly based on merit, will also take into account the benefits of diversity, including gender diversity.

Looking beyond the board to our wider workforce, we recognise the importance of diversity, including gender diversity, and the benefits this can bring to our organisation. With regard to gender diversity specifically, Johnson Matthey faces challenges similar to those faced by other organisations in the chemical, technology and manufacturing sectors. To address these, we have policies and processes in place which are designed to support gender diversity in employee recruitment, development and promotion and we are committed to ensuring that women have an equal chance with men of developing their careers within our business. Finally, we encourage gender diversity at the early career stage by working outside Johnson Matthey to encourage women to enter scientific and industrial fields.”

Gender Diversity Statistics

  Number Proportion
The board 1 woman on the board as at the date of
publication of this annual report
11% of board membership
Senior management 32 women out of 196 total as at
31st March 2012
16% of senior management
Graduate intake

30% of graduate intake
The group 2,205 women employees as at
31st March 2012
22% of group employees

The company has taken, and continues to take, several steps to promote diversity, including gender diversity, at senior management level and in the boardroom. The basis of these measures is in developing policies and processes that prevent bias in relation to recruitment and promotion, but the key to progress is in actively promoting diversity, ensuring that other positive measures are taken. These include requesting balanced shortlists when recruiting, looking at diversity mix in company events and conferences, actively discussing diversity in succession planning, promoting industrial and scientific careers to young women and developing family friendly and flexible employment policies. There are challenges to overcome, particularly in respect of gender diversity, given the sector within which the group operates but the group is making good progress.

Boardroom Diversity Policy

Following the publication of the Davies Report, in October 2011 the FRC confirmed its intention to include revisions in the next version of the amended Code to be published in 2012 in order to accommodate the Davies Report recommendation in respect of diversity policy. These revisions will require companies to include in the section of the annual report describing the work of the nomination committee a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives. The changes will formally apply to companies with a financial year commencing on or after 1st October 2012, and so for Johnson Matthey’s year ending 31st March 2014.

The board is in the process of reviewing the broad question of diversity within the group and is considering a policy for diversity.

Board Evaluation Process

The FRC also announced in October 2011 that a new supporting principle would be included in the Code to the effect that evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit and other factors relevant to its effectiveness. Again, this change will be incorporated in an updated version of the Code to be published in 2012. The board is following this principle in its board and committee evaluation process which is underway as at the date of publication of this annual report. Further information is set out under ‘2011/12 Evaluation Process’.

Appointments to the Board

As described under ‘Appointments to the Board and its Committees’, the search for board candidates is conducted, and appointments made, on merit, against objective selection criteria having due regard for the benefits of diversity on the board, including gender. Further information on diversity in the context of board appointments is contained in the Nomination Committee Report.

Board Balance – Independence of the Non-Executive Directors and of the Chairman

The question of the independence of the non-executive directors is relevant to board balance.

Director independence was reviewed by the board at its meeting on 29th March 2012. In making its determination of independence in respect of a director, the board considers all relevant relationships and circumstances, including those set out in the Code. The board considers, for example, whether the director has, or has had within the last three years, a material business relationship with the company, holds cross directorships or has significant links with other directors through involvement in other companies or bodies, or represents or has a material connection to a controlling or significant shareholder or is nominated by a shareholder.

The board considers that there are no business or other relationships or circumstances which are likely to affect, or may appear to affect, the judgment of any non-executive director and each non-executive director was determined by the board to be independent in character and judgment.

There are no cross directorships or reciprocal directorships among the directors; no two directors are also directors of another company.

Tim Stevenson was considered by the board to meet the independence criteria set out in the Code on his appointment as a non-executive director and Chairman Designate in March 2011 and on his appointment as Chairman in July 2011. Sir John Banham, who retired as Chairman at the close of the 2011 Annual General Meeting in July 2011, was not involved in the selection or appointment of Mr Stevenson as Chairman.

Information on the company’s procedures for authorising potential conflicts of interest is set out under ‘Directors’ Conflicts of Interest’.

Time Commitment of the Chairman and of the Non-Executive Directors

The board recognises that it is vital that all directors should be able to dedicate sufficient time to the company to effectively discharge their responsibilities.

The time commitment required by the company is considered by the board and by individual directors on appointment. The letters of appointment of the Chairman and of each non-executive director set out the expected minimum time commitment for their roles. Each undertake that they will have sufficient time to meet what is expected of them for the proper performance of their duties and acknowledge that there may, on occasion, be a need for additional time commitment. The minimum time commitment considered by the board to be necessary for a non-executive director and provided in the letters of appointment is two days per month following induction. In his letter of appointment, the Chairman undertook to devote such time to the affairs of the company as is required by his duties as Chairman.

The other significant commitments of the Chairman and of each non-executive director are disclosed to the board before appointment, with an indication of the time commitment involved. The board requires to be, and is, informed of subsequent changes as they arise.

Details of Tim Stevenson’s other significant commitments are set out in the Board of Directors section. There were no changes to these during the year ended 31st March 2012. On 8th May 2012 it was announced by The Morgan Crucible Company plc that Mr Stevenson would be retiring as chairman of that company on 31st July 2012.

Details of the non-executive directors’ other significant commitments are set in the Board of Directors section. Alan Ferguson has, since his appointment to the board, been appointed as a non-executive director of Croda International Plc (in July 2011), where he has chaired the audit committee since August 2011. He was also appointed as a non-executive director of The Weir Group PLC in December 2011 and has chaired its audit committee since May 2012. These appointments were reported to the board as they arose. The board assessed the impact of these appointments and believes that Mr Ferguson continues to be able to manage his time commitments and allocate sufficient time to the company to discharge his responsibilities effectively, including his responsibilities as Chairman of the Audit Committee.

Terms of Appointment of the Non-Executive Directors

The non-executive directors are appointed for specified terms subject to annual election and to the provisions of the Companies Act 2006 (the 2006 Act) relating to the removal of a director.

Any term beyond six years for a non-executive director is subject to particularly rigorous review and takes into account the need for progressive refreshing of the board. No non-executive director who will be proposed for re-election at the 2012 Annual General Meeting on 25th July 2012 will then have served longer than six years.

The terms and conditions of appointment of the non-executive directors and the contracts of service of the executive directors with the company are available to be inspected by any person at the registered office of the company during normal business hours. They are also available for inspection at the annual general meeting of the company prior to the meeting and during the meeting. Accordingly, they will be available for inspection at Merchant Taylors’ Hall, 30 Threadneedle Street, London EC2R 8JB from 10.00 am on Wednesday 25th July 2012 until the conclusion of the 2012 Annual General Meeting.

Annual Re-Election of Directors

The company’s Articles of Association require one third of the board to retire by rotation at each annual general meeting. However, the Code provides that all directors of FTSE 350 companies should be subject to re-election by their shareholders every year subject to continued satisfactory performance. In accordance with this provision, the board has decided that all directors will retire at each annual general meeting and offer themselves for re-election by shareholders.

Each director stood for re-election at the 2011 Annual General Meeting. All directors will be offering themselves for re-election at the 2012 Annual General Meeting except for Sir Thomas Harris, who will be retiring from the board at the close of that meeting.

Biographical details of each of the directors, including details of their other directorships and responsibilities and relevant previous positions held, together with any further relevant factors including details of the their skills and experience and contributions to the board, are set out in the circular to shareholders in respect of the 2012 Annual General Meeting. This is to assist shareholders to take an informed decision on the resolutions for their ­re-election. The circular sets out to shareholders why the board believes each director should be re-elected based on continued satisfactory performance in the role. In the circular, the Chairman confirms to shareholders that, following formal performance evaluation, the performance of each non-executive director proposed for re-election continues to be effective and to demonstrate commitment to the role (including commitment of time for board and board committee meetings). Further information on performance evaluation is given under ‘Evaluation of the Board, Board Committees and Directors’.

Information and Support

The board has in place processes to ensure that it is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The Chairman, through the Company Secretary and with the support of the executive directors and management, ensures that this information is of high quality in terms of its accuracy, clarity, appropriateness, comprehensiveness and currency.

Directors are able to seek clarification or amplification from management where necessary.

The role of the Company Secretary in providing support and information is set out above.

Independent Professional Advice

The non-executive and the executive directors have access to independent external professional advice (such as legal and financial advice) at the company’s expense where they judge this necessary to discharge their responsibilities as directors.

Director Induction, Familiarisation, Training and Development

Induction

The company puts in place full, formal and tailored induction programmes for all new directors on joining the board. While this takes into account the directors’ different backgrounds and experience, the induction is aimed to be a broad introduction to the group’s businesses and its areas of significant risk. Key elements of the induction process are meeting the executive directors and senior and middle management individually and collectively and visiting the group’s major operating sites.

Since their appointments Tim Stevenson and Alan Ferguson have undergone tailored induction programmes facilitated by the Company Secretary. These programmes included meetings with the Chief Executive, the executive directors and senior management in order to be briefed on group strategy and on individual businesses, briefing sessions with key group functions and visits to the principal UK sites. The programmes also allowed Mr Stevenson and Mr Ferguson to familiarise themselves with any issues arising from service on, or chairmanship of, board committees. As part of his induction programme, Tim Stevenson had separate meetings with several major shareholders.

Familiarisation, Training and Development

To ensure the effective fulfilment of the roles of the directors on the board and on the board committees and to ensure that their contributions remain informed and relevant, various steps are taken to ensure that all directors are able to gain and to continually update and refresh their knowledge and skills. The intention is that all directors have familiarity with, and appropriate knowledge of, the company and gain access to its operations and employees. The board ensures that the company provides the necessary resources to allow this to happen.

Each board meeting includes one or more business or strategy presentations from senior managers. To ensure that the board is kept up to date on important matters, including environmental, legal, governance and regulatory developments, presentations are also made to the board by both external and internal advisers.

The board also holds at least one board meeting per year at one of the group’s operational sites and takes the opportunity to tour the site and discuss business issues, risks and strategy with local management. During the year ended 31st March 2012, the board visited Fine Chemicals’ API manufacturing facility at Riverside, Conshohocken, Pennsylvania, USA in September 2011 and Precious Metal Products’ Catalysts and Chemicals manufacturing facility at Royston, Hertfordshire in the UK in March 2012. The board toured these sites and received presentations from management on the recently acquired facility at Riverside and on Catalyst and Chemicals’ new products respectively. Individual non-executive directors also undertake site visits.

Such presentations, meetings and site visits assist the non-executive directors in familiarising themselves with, and gaining a greater insight into, the group’s businesses and help to give a balanced overview of the group. They enable the non-executive directors to continue to develop and refresh their knowledge and understanding of the group’s businesses, the markets in which it operates and its key relationships. They are also important for building links with the group’s employees.

As part of the annual performance review process referred to under ‘Evaluation of the Board, Board Committees and Directors’, the Chairman meets with each director annually on a one to one basis to review and agree their individual training and development requirements.

Indemnification of Directors and Insurance

Under Deed Polls dated 20th July 2005 the company granted indemnities in favour of each director of the company in respect of any liability that he or she may incur to a third party in relation to the affairs of the company or any group member. Such indemnities were in force during the year ended 31st March 2012 for the benefit of all persons who were directors of the company at any time during the year and remain in force for the benefit of all persons who are directors of the company as at the date when this Report of the Directors was approved and from that date up to the date of publication of this annual report.

Under Deed Polls also dated 20th July 2005 the company granted indemnities in favour of each director of its subsidiaries in respect of any liability that he or she may incur to a third party in relation to the affairs of any group member. Such indemnities were in force during the year ended 31st March 2012 for the benefit of all persons who were directors of the subsidiaries at any time during the year and remain in force for the benefit of all persons who are directors of the subsidiaries as at the date when this Report of the Directors was approved and from that date up to the date of publication of this annual report.

The company has in place appropriate directors and officers liability insurance cover in respect of legal action against, amongst others, its executive and non-executive directors.

Copies of the Deed Polls and the company’s Articles of Association are available to be inspected by any person at the registered office of the company during normal business hours. They are also available for inspection at the annual general meeting of the company prior to the meeting and during the meeting. Accordingly, they will be available for inspection at Merchant Taylors’ Hall, 30 Threadneedle Street, London EC2R 8JB from 10.00 am on Wednesday 25th July 2012 until the conclusion of that meeting.

Neither the company nor any subsidiary has indemnified any director of the company or a subsidiary in respect of any liability that he or she may incur to a third party in relation to a relevant occupational pension scheme.

Directors’ Conflicts of Interest

Under the Companies Act 2006 (the 2006 Act), a director must avoid situations in which he or she has, or can have, a direct or indirect interest that conflicts with, or may conflict with, the interests of the company. This covers, in particular, the exploitation of property, information or opportunity and it applies whether or not the company is in a position to take advantage of it. There is no breach of this duty if authorisation of the conflict situation has been given by the independent directors. The company’s Articles of Association give power to the independent directors to give such authorisation but board authorisation is not permitted in respect of the acceptance of benefits from third parties. Directors also have a duty under the 2006 Act to make prior declaration to the other directors of the nature and extent of any direct or indirect interest in a proposed transaction or arrangement with the company. Additionally, directors must declare the nature and extent of any direct or indirect interest in an existing transaction or arrangement entered into by the company, to the extent that the interest has not been declared under the duty in respect of proposed transactions or arrangements.

Established procedures in accordance with the company’s Articles of Association are in place to ensure compliance with the directors’ conflicts of interest duties under the 2006 Act and for dealing with conflict of interest situations. The company has complied with these procedures during the year ended 31st March 2012 and from that date up to the date of publication of this annual report. During the year, details of any new conflicts or potential conflict matters were submitted to the board for consideration and, where appropriate, these were approved.

In March 2012, the board undertook an annual review of the register of previously approved conflict or potential conflict matters and, to the extent that these were still relevant, agreed that they should continue to be authorised on the terms previously set out. In each case, the review was undertaken by directors who were genuinely independent of the conflict matter. Authorised conflict or potential conflict matters will continue to be reviewed by the board on an annual basis.

The board confirms that the company complies with its procedures in place to authorise conflict situations and is satisfied that its powers to authorise conflict situations are being exercised properly and effectively and in accordance with the company’s Articles of Association.

Evaluation of the Board, Board Committees and Directors

With the aim of improving effectiveness, the board undertakes a formal annual evaluation of its own performance and that of its committees and individual directors. The evaluation, which is led by the Chairman, aims to be as rigorous and objective as possible.

The process for evaluation of the board considers its strengths and weaknesses, the range and balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender diversity, how the board works together as a unit and any other factors considered relevant to its effectiveness. Individual evaluation aims to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including time commitment). The Chairman acts on the results of the performance evaluation. The strengths are recognised and any weaknesses addressed.

2010/11 Evaluation Process

Following the appointment of Tim Stevenson as Chairman Designate in March 2011, the board instigated a formal evaluation of its performance and that of its committees and individual directors. This evaluation was led by Tim Stevenson and was externally facilitated by an independent consultant experienced in board evaluation. This was the first time that the board had undertaken an externally facilitated evaluation process. The external facilitator had no other connection with the company and was not subject to any conflict of interest. The evaluation was designed, in particular, to allow Tim Stevenson to gain an objective overview and evaluation of the workings of the board and its committees, of strengths and weaknesses, of areas for further improvement and of the contributions of individual directors. The review was intended to build on the internal board review carried out by the Company Secretary in 2009/10.

The methodology of the evaluation included a series of detailed one to one meetings with each director and the Company Secretary in order to gather views and feedback. The external evaluator also attended one full board meeting as an observer. The review covered the following main areas, which were determined by the Chairman and the external evaluator to be of most importance or value to the board:

The full evaluation process was not complete at the date of publication of the 2011 annual report and has since been concluded. Overall feedback from the evaluation was provided in the form of a presentation by the external evaluator at a meeting of the board in May 2011, which then debated the findings. The board also discussed the evaluation process itself and agreed that the external evaluation was broadly effective. The external evaluator also provided a comprehensive written report to the Chairman, feedback to the board committee chairmen and individual feedback for the Chief Executive.

Good progress was noted across all the areas of review, building on initiatives and action developed as a result of prior effectiveness reviews. Certain suggestions were made to ensure continuing progress. The evaluation process gave assurance that each director continued to contribute effectively and demonstrated commitment to the role.

The Chairman agreed with the board that no actions or changes to board or committee practice were required in the immediate term following the review but that the output would be considered further following his appointment as Chairman in July 2011 and in the course of the review for 2011/12 to ensure continuing improvement.

2011/12 Evaluation Process

As the 2010/11 review process had been externally facilitated, the board decided to conduct an internal review process during 2012. The evaluation of the performance and effectiveness of the board and its committees and individual directors is being conducted by the Chairman in collaboration with the board committee chairmen. The evaluation is not complete at the date of publication of this annual report.

The evaluation process has included one to one interviews by the Chairman with each director and the Company Secretary. The topics being discussed, which were determined by the Chairman to be the principal areas of focus following the externally facilitated review in the previous year, include:

In carrying out the evaluation, the board is following the new supporting principle to be included in the Code, as announced by the FRC in October 2011, to the effect that evaluation of the board should consider, amongst other things, the board’s diversity, including gender diversity. Further information is set out under ‘Board Evaluation Process’.

The Chairman proposes to report the outcome of the evaluation process to the board meeting in July 2012. The board will debate the findings and any lessons to be learned and will agree any follow up actions and responsibilities as appropriate. The key outcomes of the evaluation processes and the steps the board intends to take to address any issues will be reported in the 2013 annual report.

Future Reviews

The board intends to undertake an externally facilitated evaluation process at least every three years. In the intervening years, the review will be facilitated by the Chairman supported by the Senior Independent Director and the Company Secretary.

Review of the Chairman’s Performance

The non-executive directors recognise that the Chairman’s effectiveness is vital to that of the board. Led by the Senior Independent Director, the non-executive directors are responsible for performance evaluation of the Chairman and for providing a fair and balanced assessment to shareholders.

In view of the change in the chairmanship of the company with the appointment of Tim Stevenson as Chairman on 19th July 2011, a separate formal review of the Chairman’s performance was not undertaken during the year ended 31st March 2011 but feedback on the Chairman’s performance was reflected in the externally facilitated evaluation referred to above. A review of the Chairman’s performance was, however, undertaken in the year ended 31st March 2012. On 28th March 2012, the non-executive directors, led by the Senior Independent Director, met separately, without the Chairman being present, to discuss the Chairman’s performance. In doing so they took into account the views of executive directors. The results were subsequently reported by the Senior Independent Director to the board. They considered that the Chairman demonstrated effective leadership and that his performance and contribution were strong.

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