Chairman’s introduction to governance

The Annual Report is the principal means of reporting to our shareholders on the Board’s governance policies. This Report sets out how the main and supporting principles of good corporate governance contained in Section 1 of the Combined Code (June 2008 version), have been applied in practice. The Code is publicly available on the Financial Reporting Council (FRC) website frcpublications.com

Following the publication of the updated Combined Code (now the UK Corporate Governance Code) by the FRC in June 2010 and the issuance of the FRC’s Guidance on Board Effectiveness in March 2011 we took the opportunity to review our governance practices and procedures. Whilst we will be reporting formally on the updated Code in next year’s Annual Report (as required by the updated Code), I am pleased to say that our review has indicated that we are well placed to comply fully with its provisions.

Role of the Board and its effectiveness

My primary role as Chairman is to provide leadership to the Board and to provide the right environment to enable the Directors and the Board as a whole to perform effectively to promote the success of the Company for the benefit of its shareholders. In doing so we take account of the interests of our customers, employees, suppliers, communities in which we operate and other interested stakeholders.

Although I firmly believe we do have good governance in place and operate effectively as a Board, there is always room for improvement. Each year we carry out a detailed performance evaluation of the Board and each of the Committees as well as of the Directors and the Group General Counsel & Company Secretary. Further details of the review are set out later in this report. One particular aspect I am always mindful of is the need to ensure that the Non-executive Directors continue to have appropriate up to date knowledge and understanding of both South West Water and Viridor as they develop and pursue new initiatives. It is with that in mind that during the year the Board has had a number of visits to key sites within both South West Water and Viridor and has met and discussed current issues with key managers and employees across the Group. Our visits have been to a broad range of waste plants in Scotland, Greater Manchester and near London (Lakeside), Household Waste Recycling Sites and traditional and modern sewage treatment facilities. The Board has also received a number of presentations on key developments in the businesses including remote monitoring, sustainable energy saving and environmental protection initiatives.

As reported last year, the Board has been considering the options available for an externally facilitated performance evaluation in accordance with the updated Code’s provisions. During 2011/12 the Board will be undertaking an evaluation supported by an independent external consultancy, with the aim of achieving real added value for the Directors and the Board as a whole.

Shareholder engagement

The Directors and I recognise the importance and value of regular communications with our shareholders. This ensures that we understand their needs and wishes and hopefully that we provide them with confidence that we have the right governance structures, processes and systems in place to assist us in achieving our stated objectives.

A regular dialogue with the Company’s institutional shareholders is maintained through a comprehensive investor relations programme. During the year some 60 meetings with institutional shareholders (including with prospective shareholders) were held and attended by the Group Director of Finance and the Company’s Investor Relations Manager. The Chief Executive of South West Water, the Chief Executive of Viridor and I also attended when appropriate. The Group Director of Finance reports to the Board regularly on major shareholders’ views about the Group and every six months a presentation is received by the Board from the Company’s Brokers on equity market developments and shareholder perceptions.

I also actively encourage the participation of shareholders at our Annual General Meeting (AGM) and as usual at our 2011 AGM on 28 July all our Directors aim to be present together with a number of directors and executives of South West Water and Viridor to meet with shareholders to discuss the business of the Group.

Annual re-election of directors

It is Pennon Group’s view, along with many other companies and interested parties, that the decision of the FRC in updating the Combined Code to include a provision for the annual re-election of all directors was not in the interests of companies generally and could be detrimental to good governance. Our concerns are that it can encourage short-termism by shareholders and removes the protection provided in most company’s Articles of Association to ensure that there is a continuing number of directors on the Board who have in-depth experience and understanding of their business. It could also make it more difficult to recruit new board members. Even though we regard this change as not being in the interests of companies or their shareholders, we nevertheless do wish to ensure full compliance with the updated Code wherever possible and therefore the Board has agreed that each Director will stand for re-election at the 2011 AGM. Along with many other companies we will monitor the effect of this provision over time.

Compliance with Combined Code and other requirements

I am pleased to report that throughout the year the Company complied with the provisions and applied the main principles of Section 1 of the Combined Code with no exceptions to report.

My introduction to this Corporate Governance Report and the following sections are made in compliance with the Combined Code, FSA Listing Rule 9.8.6 and FSA Disclosure and Transparency Rules 7.1 and 7.2 and cover the work of our Board and its Committees; our internal control systems and procedures including risk management; our corporate governance statements relating to share capital and control; and our Going Concern and Directors’ Responsibilities Statements.

Ken Harvey
Chairman
22 June 2011