CORPORATE GOVERNANCE STATEMENT For Marks and Spencer Group plc ( Marks & Spencer ; M&S ; the Company ) for the year ended 2 April 2016

Transcription

1 CORPORATE GOVERNANCE STATEMENT For Marks and Spencer Group plc ( Marks & Spencer ; M&S ; the Company ) for the year ended 2 April 2016 The Board s objective is to build a sustainable business through consistent, profitable growth and to make sure that we act responsibly in meeting our accountabilities to shareholders and wider stakeholders. The governance principles which apply to all companies with a premium listing on the London Stock Exchange are found in the UK Corporate Governance Code (the Code). This statement provides a detailed account of how the Company has applied the Code s principles and how we comply with its provisions. It sets out our approach to governance and supplements the information given in our 2016 Annual Report, approved by the Board on 24 May Compliance with the Code The UK Corporate Governance Code 2014 (the Code ) is the standard against which we were required to measure ourselves in 2015/16. Throughout the year ended 2 April 2016 the Company complied with all provisions of the Code, and we remain committed to the highest standards of corporate governance. A DIRECTORS A.1 The Role of the Board: Every company should be headed by an effective Board, which is collectively responsible for the long-term success of the company. The Board agrees with the role for Boards given in the Code, which it has adopted in its Governance Framework: to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed; to set the Company's strategic aims, ensuring that the necessary financial and human resources are in place for the Company to meet its objectives and review management performance; and to set the Company's values and standards and ensure that its obligations to its shareholders and others are understood and met. On appointment, all directors are individually briefed by the Group Secretary on the duties they owe as directors to the Company. Our Governance Framework includes the statutory duties set out in the Companies Act The central duty is the duty to act in good faith and in a way most likely to promote the success of the Company for the benefit of its members as a whole. In fulfilling this duty, directors should have regard to (amongst other matters) the likely consequences of any decision in the long term; the interests of employees; the need to foster business relationships with suppliers, customers and others; the impact of operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between members of the Company. The Board is the guardian of the M&S brand, its reputation and stakeholder relationships. We have built our core business values of Inspiration, Innovation, Integrity and In Touch eon the principles that have guided M&S since it was founded in We believe that these values are essential in sustaining the business and securing its long-term future. At M&S, our values help support us and ensure we reflect on doing the right things in the right way, even if this means making difficult choices. We believe that these values should continue to guide the principles of how we do business and, if we continue to respect these, they should underpin our performance for the longer term. Being true to our values and being fair has underpinned our behaviour with our

2 stakeholders, as well as enabling us to build and maintain a trusted relationship with our customers, employees, suppliers and the communities in which we have operated over the last 130 years. At M&S, governance is focused not only on the Boardroom but right across the business. We believe that good governance ultimately produces a better business and improves long-term performance. It is not just what we do, but how we do it that matters. The work of the Board should complement, enhance and support the work of the Executive. The Board seeks to achieve this through setting out its strategy, monitoring its strategic objectives and providing oversight of its implementation by the management team. Working together, the Board conducts robust interrogations of plans and actions, ensuring high quality decision-making in all areas of strategy, performance, responsibility and accountability. The role of the Chairman is at the heart of ensuring these actions are sustained and harnessed and can drive a culture of continuous improvement in standards and performance across our business, ensuring we have a Board that: supports the executive team to formulate and execute the strategy; demonstrates independence, knowledge and experience to bring fresh perspectives and to hold management to account; seeks full information to form views, question management and take strategic decisions; is diverse and while acknowledging the recommendations on diversity, ensures that we have the right balance of skills, experience and background; and acts responsibly to make sure we meet our accountabilities to shareholders and wider stakeholders. A.1.1 The Board held eight scheduled meetings during 2015/16. It plans its meetings at least 18 months in advance in line with its financial reporting calendar. The Board has a formal schedule of matters reserved for its decision and delegates certain matters to committees, as set out below. The Board determines the overall Group strategy; creation, acquisition or disposal of material corporate entities or assets; development and protection of the brand; matters of public interest that could affect the Group's reputation; public announcements including statutory accounts; significant changes in accounting policy; capital structure and dividend policy; operating plans and key performance indicators; prosecution, defence or settlement of material litigation; Group remuneration policy and Board structure, composition and succession. The Board has reviewed the schedule of matters reserved for its attention, which is set out within the Governance Framework. This outlines the terms of reference of the Board and its committees and is available on our website. An overview of what the Board has done during the year is provided on pages 36 and 37 of the Annual Report. A.1.2 Key Board appointments are carried out by the following people: Robert Swannell Chairman, and Nomination Committee Chairman; Steve Rowe Chief Executive; Vindi Banga Senior Independent Director and Remuneration Committee Chairman; Andy Halford - Audit Committee Chairman. The Board attendance table is set out on page 35 of the Annual Report. The Nomination, Audit and Remuneration Committee attendance tables are set out on pages 40, 42 and 51 respectively. Amanda Mellor is Group Secretary and ensures that the Board receives information and papers in a timely manner to enable full and proper consideration of agenda items agreed in advance in its annual meeting planner. Any director who is unable to attend a Board or Committee meeting reviews the relevant papers and provides comments in advance to the Chairman or Committee Chairman as appropriate. A.1.3 Directors are granted an indemnity from the Company in respect of liabilities incurred as a result of their office. In respect of those matters for which they cannot be indemnified, the Company maintains

3 appropriate liability insurance for the benefit of directors. A.2. Division of Responsibilities: There should be a clear division of responsibilities at the head of the company between the running of the Board and the executive responsibility for the running of the company's business. No one individual should have unfettered powers of decision. A.2.1 The roles of Chairman and Chief Executive are not exercised by the same individual. The division of responsibilities is clearly established between the Chairman, Robert Swannell and Chief Executive, Steve Rowe and these are set out in the Governance Framework, which is reviewed and approved by the Board. A.3 The Chairman: The Chairman is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role. A.3.1 the Code. The Chairman on appointment met and continues to meet the independence criteria set out in B.1.1 of A.4 Non-Executive Directors: As part of their role as members of a unitary Board, non-executive directors should constructively challenge and help develop proposals on strategy. A.4.1 Vindi Banga, Senior Independent Director, provides a communication channel between the Chairman and the non-executive directors. He ensures that the views of each non-executive director are given due consideration. He is an additional contact point for shareholders if they have reason for concern that cannot be addressed through the normal channels of Chairman, Chief Executive or other executive directors or for which such contact is inappropriate. A.4.2 The Chairman meets the non-executive directors without the executives present to make sure they are sufficiently prepared for Board and committee duties and to receive further insight into the performance of the Group and management. The Senior Independent Director chairs meetings of the non-executive directors without the Chairman present to review the performance of the Group generally and the Chairman in particular. A.4.3 Directors' concerns, which cannot be resolved, about the running of the Group or a proposed action, would be recorded in the Board minutes. On resignation, a non-executive director with such concerns would be expected to provide a written statement to the Chairman, for circulation to the Board. No such concerns have been highlighted. B EFFECTIVENESS B.1 The Composition of the Board: the Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. B.1.1 The Board has determined that each non-executive director is independent in character and judgement; commits sufficient time and energy to the role, and continues to make a valuable contribution to the Board and its committees. The Board keeps under review whether there are relationships or circumstances which are likely to affect, or could appear to affect their independence.

4 B.1.2 At least half the Board comprises independent non-executive directors, excluding the Chairman. B.2 Appointments to the Board: There should be a formal, rigorous and transparent procedure for the appointment of new directors to the Board. Steve Rowe formally took up the role of Chief Executive on 2 April 2016, following the announcement of his appointment in January He succeeded Marc Bolland, who retired in April Prior to that, Steve was appointed Executive Director, General Merchandise in July 2015 following the resignation of John Dixon. Andrew Fisher joined the Board as a non-executive director on 1 December 2015 and joined the Nomination Committee on that date. He joined the Audit Committee on 3 February Andrew is Executive Chairman of Shazam Entertainment Limited. B.2.1 The appointment of new directors is led by the Nomination Committee, which comprises Robert Swannell (Chairman) and all six independent non-executive directors: Vindi Banga, Alison Brittain, Miranda Curtis, Andrew Fisher, Andy Halford and Richard Solomons. The Committee s terms of reference which are available on the Company's website. An overview of what the Committee has done during the year is provided on page 40 of the Annual Report. The Group Secretary acts as secretary to the Committee and ensures that it receives information and papers in a timely manner to enable full and proper consideration of agenda items agreed in advance in its annual meeting planner. B.2.2 The Nomination Committee s primary role is to ensure that appropriate procedures are in place for the nomination, selection, training and evaluation of directors and for succession planning. It reviews the Company s Board structure, size, composition, diversity and succession requirements, thereby keeping under consideration the balance of membership and the required blend of skills, knowledge and experience of the Board. Appointments are made on merit and against objective criteria to ensure that the Board maintains a balance of skills and experience. B.2.3 Under the Company s Articles of Association, all directors seek election at their first Annual General Meeting following appointment and all directors are required to offer themselves for re-election at least every three years. However, the Board follow the more rigorous guidance in relation to the re-election of directors; specifically that all directors will be subject to annual election by shareholders. At the 2016 AGM, Andrew Fisher will be seeking election following his appointment to the Board as nonexecutive director. All of the remaining directors will be seeking re-election. Any term beyond six years (i.e. two three-year terms) for a non-executive director is subject to rigorous review. B.2.4 The Nomination Committee formally met five times during the year. Succession and director development have been key areas of focus for the Committee this year, culminating with the appointment of Steve Rowe as the new CEO, and the appointment of Andrew Fisher as a non-executive director. It has also focused on development of directors and high performing individuals below Board level. For each appointment, considerable time was spent reviewing the existing skill-set on the Board, discussing its diversity in line with our policy, specifically in terms of background and experiences, nationality and gender and

5 balancing this against what the business will need to become an international multi-channel retailer. Considerable time was spent with our external consultants managing a formal, thorough and orderly search, reviewing all those candidates that might fit our criteria. In 2012 we published our first Board diversity policy, which set out our targets and objectives to ensure that diversity, in its broadest sense, remains a central feature of the Board. Since setting out our ambitions and objectives, the Board has made some positive steps in broadening the diversity not just of the Board, but of our senior management. We have reported against each of our policy objectives below. In 2015, the Board reviewed its policy to ensure it continues to drive the benefits of a diverse Board and workforce across the business. The Board agreed that the ambitions and objectives set out in the policy remain relevant targets against which to measure our progress. Maintain a level of at least 30% female directors on the Board over the short to medium term During the year the Board experienced two retirements and one resignation. Despite the reduced overall size of the Board, the percentage of women on the Board remains strong at 36%. The Board remains committed to maintaining at least a 30% female representation on the Board, whilst ensuring that diversity in its broadest sense remains a central feature. The Nomination Committee will continue to recommend appointments to the Board based on merit, measured against objective criteria and the skills and experience the individual offers. The Board is also committed to strengthening the pipeline of senior female executives within the business and has taken steps to ensure that there are no barriers to women succeeding at the highest levels within M&S. Assist the development of a pipeline of high-calibre candidates by encouraging a broad range of senior individuals within the business to take on additional roles to gain valuable board experience During the year, the Board continued to focus on strengthening the pipeline of executive talent in the company. It remains committed to learning and building on existing programmes while introducing new initiatives to broaden and develop the strong talent which exists across the business, including - A comprehensive talent review presented to the Board annually, mapping successional candidates and opportunities across all senior roles within the business. - The Leadership Development Service continues to identify and partner key senior talent across the business, broadening their skill sets and experience to prepare them for future opportunities. This has been supported through greater boardroom exposure, non-executive and Trustee roles outside of M&S, and participation in mentoring schemes. - Access to International Business School Training - Senior management mentoring and coaching schemes, including individual leadership assessments, and non-executive director sponsored lunches and breakfasts. Consider candidates for appointment as non-executive directors from a wider pool, including those with little or no listed company board experience During the year, the Nomination Committee discussed the Board s successional needs, and continues to work closely with executive search agencies in compiling long and short lists of candidates. During the search for the most recent appointments, the Board identified and interviewed a range of candidates from various backgrounds and industries, and all candidates were measured against criteria agreed at the start of the process. The Chairman also meets informally with a range of people introduced by third parties or through direct approaches. Although we do not currently openly advertise our non-executive director positions, we appreciate the benefit of this approach and will keep this under review.

6 Ensure long lists of potential non-executive directors include 50% female candidates The Board remains committed to ensuring that high performing women from a variety of backgrounds who have the requisite skills, are given greater exposure to the Nomination Committees of FTSE100 companies. Once again, the Board met its commitment, and all non-executive director long lists in 2014/15 included 50% female candidates. Only engage executive search firms who have signed up to the voluntary Code of Conduct on gender diversity and best practice The Board continues to support the nine principles of the Executive Search Firms Voluntary Code of Conduct on gender diversity, demonstrated by remaining committed to only engaging executive search firms who are signatories to this code. During the year, we continued to work closely with Egon Zehnder and JCA, and maintained our focus on the targets and ambitions around female representation on the Board. The Board confirms that Egon Zehnder and JCA have no other connection with the Company. Report annually against these objectives and other initiatives taking place within the Company which promote gender and other forms of diversity The Board has made strong progress against the key policy objectives during the year. In addition, the business has continued to promote diversity with the introduction or continuation of key initiatives: - The annual Board evaluation process includes an assessment of the Board s diversity including gender, helping to objectively consider its composition and effectiveness; - M&S inspiring Women s Network launched in 2014, continues to support the progress of women in our business, giving access to a range of role models, providing informal mentoring and networking opportunities, and creating a forum for discussion to explore and address the career challenges women face; - Continued involvement in the government-backed 30% Club, an organisation committed to increasing female representation on UK Boards. - The MBA Leadership Programme is in its fifth year, recruiting and developing talented MBA graduates from international business schools; to date intake into the programme has been over 50% women; - A number of programmes to help people in our communities, including Marks & Start, Marks & Start Logistics and Make Your Mark are successfully helping young people, the homeless, lone parents and those with disabilities to find work in our stores and distribution centres. Report annually on the outcome of the Board evaluation, the composition and structure of the Board as well as any issues and challenges the Board is facing when considering the diverse make-up of the Company We continue to regard the board evaluation process as an important means of monitoring our progress. Full details of the 2015/16 board evaluation and the Action plan are on page 39 of the Annual Report. We remain committed to getting the right balance of internal versus external hires and work towards understanding and managing some of the challenges we face, such as: - International management experience reflective of the customers and communities we serve; and - Any main challenges women face to reach regional management positions and above, within the business. B.3 Commitment: All directors should be able to allocate sufficient time to the Company to discharge their responsibilities effectively. B.3.1 A job specification for the Chairman was prepared in advance of Robert Swannell s appointment to the

7 Board, which includes an assessment of the time commitment expected. This is available to view in the Governance Framework on the Company s website. The Chairman s other significant commitments are disclosed to the Board before appointment, changes to such commitments are reported to the Board as they arise and are included on page 32 of the Annual Report. B.3.2 The non-executive directors have ensured that they have sufficient time to carry out their duties. The appointment letter for non-executive directors sets out their terms and conditions of appointment, detailed information on the Group and the expected time commitment, including dates of future Board meetings and AGMs. Their other significant commitments are disclosed to the Board before appointment, with a broad indication of the time involved. The Board is informed of any subsequent changes. Their letters of appointment are available for inspection through the Group Secretary and at our AGM. B.3.3 No full time executive director has taken on more than one non-executive directorship of a FTSE 100 company, or the chairmanship of such a company. B.4 Development: All directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge. The Chairman encourages the directors to continually update their skills, knowledge and familiarity with the Group through their initial induction, on-going participation at Board and committee meetings, meeting employees at store locations and elsewhere, whilst keeping up-to-date on governance and legal matters and the views of customers and shareholders. B.4.1 On joining the Board the Chairman ensures that all new directors receive a full, formal and tailored induction to the Group, the executive directors also follow our corporate induction framework for senior management. These inductions cover key areas, including company structure and strategy, industry and competitive environment and sentiment and reputation. All directors are provided the opportunity to meet major shareholders. Both Andrew Fisher and, following the announcement of his appointment as CEO, Steve Rowe, received comprehensive, formal and highly tailored induction programmes, supported by one-on-one meetings with the Chairman, Group Secretary, executive directors, members of senior management and a wide range of individuals from across the business, and the opportunity to meet with major shareholders. B.4.2 As part of the annual Board evaluation, the Chairman reviews and agrees with each director their training and development needs. B.5 Information and Support: The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The Chairman ensures that the directors receive accurate, timely and clear information. They receive regular updates on business performance against the annual operating plan, the strategy and investment decisions, together with business reports and presentations from senior management at Board meetings. The Group Secretary and Head of Corporate Governance supports the Chairman in carrying out his governance accountabilities. She also makes sure the non-executives receive the information and access to the people they

8 need. She keeps the directors informed on governance, regulation and legislative change through her written report to each Board meeting. She is supported by the Governance Group - comprising secretariat, legal, insurance, internal audit & risk, pensions, the company archive and BIG (employee representatives) - which helps and supports colleagues to do the right thing, the right way with governance that is meaningful, relevant and focused on improving the business, both in the UK and overseas. Board papers are distributed electronically via ipads. B.5.1 There is an established procedure whereby the Board or any of its committees may take independent professional advice when appropriate. Any individual director, wishing to do so in the furtherance of their duties, may take independent professional advice through the Group Secretary at the Company's expense. B.5.2 The Group Secretary plays a key role in the promotion of good governance, therefore the appointment or removal of this person is a matter for the Board as a whole. B.6 Evaluation: The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. The M&S Board is committed to best practice in its governance activities. The annual Board effectiveness review provides a useful opportunity for the Board to take a step back and reflect on their collective and individual effectiveness, consider where improvements can be made and chart progress. B.6.1 The Annual Report sets out how the Board and its committees have been reviewed and their respective performances during 2015/16, the outputs and the action planning for 2016/17. The Board and committees reviews were conducted against the principals set out in the UK Corporate Governance Code. All participants were interviewed according to an agenda tailored specifically for our Board and committees, and all were hugely supportive of our aims, embraced our desire to elicit a diversity of views, and demonstrated a commitment to achieving exemplary performance. B.6.2 During 2015/16, the Board and its committees were again reviewed. Given the change in leadership of the Company during the year, the Board were keen for its evaluation to highlight learnings from the past and build on these for the future. The evaluation was internally facilitated by the Group Secretary and undertaken from February to April Next year, after a gap of two years, we intend to use an outside facilitator. B.6.3 The non-executive directors, led by the Senior Independent Director, have reviewed the performance of the Chairman taking into account the views of the executive directors, against his accountabilities and the business objectives and confirm that he demonstrates strong leadership of the Group. B.7 Re-election: All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. B.7.1 All directors were subject to election by shareholders at the 2015 AGM. All directors will again stand for election by shareholders at the 2016 AGM. Directors biographies are given on pages 32 and 33 of the Annual Report and can be viewed on our corporate website, enabling shareholders to take an informed decision when determining their (re)-election.

9 B.7.2 The papers accompanying the resolutions to elect each non-executive director set out to shareholders why the Board believes that they should be elected and that, following a formal evaluation, the individual s performance continues to be effective and demonstrates commitment to the role. SECTION C ACCOUNTABILITY C.1 Financial and Business Reporting: The Board should present a fair, balanced and understandable assessment of the Company s position and prospects. The Board applies a consistent approach in its financial reporting, which includes interim and other pricesensitive public reports as well as reports to regulators and information required by statute. The Board has established arrangements that enable it to assess that the information presented is fair, balanced and understandable. C.1.1 The responsibilities of the directors in preparing the accounts and the statement by auditors about their reporting responsibilities are set out on pages 77 and 85 respectively of the Annual Report. Confirmation that the directors consider the annual report and accounts, taken as a whole, to be fair, balanced and understandable is given on page 77 of the Annual Report. C.1.2 An explanation of the basis on which the Company creates value for shareholders and generates value over the longer term is set out in the Annual Report on pages 2 to 29, along with details of the strategy for delivering the Company s objective of becoming an international, multi-channel retailer. C.1.3 The directors' going concern statement is given on page 77 of the Annual Report. Based on the Group s cash flow forecasts and projections, the Board is satisfied that the Group will be able to operate within the level of its facilities for the foreseeable future. C.2 Risk Management and Internal Control: The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems. One of the Board's key accountabilities is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed. Effective risk management is critical to the Board s achievement of its strategic objectives and the long-term sustainable growth of our business. C.2.1 The Board, through the Audit Committee, has conducted a review of the effectiveness of the systems of the Company s risk management and internal control systems as described below. Risk management We believe that effective risk management is critical to the achievement of our strategic objectives and the long-term sustainable growth of our business.

10 The Board has overall accountability for ensuring that risk is effectively managed across the Group and, on behalf of the Board, the Audit Committee reviews the effectiveness of the Group Risk Management Process. Each business area is responsible for identifying, assessing and managing the risks in their respective area. Risks are identified and assessed by all business areas half-yearly and are measured against a defined set of criteria, considering likelihood of occurrence and potential impact to the Group. The Group Risk function facilitates a risk identification and assessment exercise with the Executive Board members. This information is combined to form a consolidated view of risk. The top risks (based on likelihood and impact) form our Group Risk Profile, which is reported to the Executive Board for review and challenge, ahead of it being submitted to Group Board for final review and approval. To ensure our risk process drives continuous improvement across the business, the Executive Board monitors the ongoing status and progress of key action plans against key risks quarterly. Risk remains a key consideration in all strategic decision-making by the Board, incorporating debate on risk appetite. C.2.2 Our principal risks and uncertainties As with any business, we face risks and uncertainties on a daily basis. It is the effective management of these that places us in a better position to be able to achieve our strategic objectives and to embrace opportunities as they arise. Details of our principal risks and the mitigating activities in place to address them are presented on pages 28 and 29 of our Annual Report. It is recognised that the Group is exposed to a number of risks, wider than those listed in the Annual Report. However, a conscious effort has been made to disclose those of most concern to the business at this moment in time and those that have been the subject of Board or Audit Committee debate. To achieve a holistic view of the risks facing our business, both now and in the future, we consider those that are: external to our business; core to our day-to-day operation; related to business change activity; and those that could emerge in the future. The risk and our business model diagram on page 27 of the Annual Report maps our principal risks to our business model. This mapping helps us assess and manage risk, and provides a greater understanding of our principal risks in the context of our business operations, including their broader influence on viability. C.2.3 Internal control The Audit Committee has completed its review of the effectiveness of the Group s systems of internal control during the year and up to 24 May 2016, the date of the Annual Report, in accordance with the requirements of the revised Turnbull Guidance on Internal Control, published by the FRC. It confirms that no significant failings or weaknesses were identified in the review for 2016/17. Where areas for improvement were identified, processes are in place to ensure that the necessary action is taken and that progress is monitored. The key features of the Group s internal control and risk management systems that ensure the accuracy and reliability of financial reporting include: clearly defined lines of accountability and delegation of authority, policies and procedures that cover financial planning and reporting, preparing consolidated accounts, capital expenditure, project governance and information security, and the Group s Code of Ethics and Behaviours.

11 On behalf of the Board, the Audit Committee examines the effectiveness of the Group s: Systems of internal control, covering all material controls, including financial, operational and compliance controls and risk management systems, primarily through approving the internal audit plan and reviewing its findings, reviews of the annual and half year financial statements and a review of the nature, scope and reports of external audit; Management of risk by reviewing evidence of risk assessment activity and an internal audit report on the process; and Action taken or to be taken to manage critical risks or to remedy any control failings or weaknesses identified. This year, the Group Board has placed significant focus on developing our approach to risk appetite. By expressing the types and amount of risk we are willing to take or accept to achieve our strategic and operational objectives, we aim to support consistent, risk-informed decision-making across the Group. C3 Audit Committee and Auditors: The Board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the Company s auditor. C.3.1 The Audit Committee comprises four independent non-executive directors. Andy Halford (Chairman), Miranda Curtis, Alison Brittain and Andrew Fisher. The Audit Committee met five times during the year and time was allocated for Committee members to meet without Management present, prior to each meeting. In addition private meetings have been held separately with the external auditors and internal audit after each Committee meeting. The Board has satisfied itself that Andy Halford has recent and relevant financial experience and is confident that the collective experience of the members enables it to be effective. The fact that a person has been identified as having recent and relevant financial experience does not impose additional duties, obligations or responsibilities on that Audit Committee member. The Committee also has access to the financial expertise of the Group and its external and internal auditors and can seek further professional advice at the Company s expense, if required. The Group Secretary acts as secretary to the Committee and ensures that it receives information and papers in a timely manner, via ipads, to enable full and proper consideration of agenda items. These agenda items are agreed in advance in its annual meeting planner. C.3.2 The main roles and responsibilities of the Audit Committee are set out in written terms of reference which have been updated and are available on our website. An overview of what the committee has done during the year, along with how their performance was rated, is provided on pages 42 to 46 of the Annual Report. C.3.3 The terms of reference of the Audit Committee, available on our website, include its role and the authority delegated to it by the Board. C.3.4 At the request of the Board, the Audit Committee considered whether, in its opinion, the 2015/16 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and whether it provides

12 the information necessary for shareholders to assess the Group s position and performance, business model and strategy. Following its review, the Committee was of the opinion that the 2015/16 Annual Report, taken as a whole, is representative of the year and presents a fair, balanced and understandable overview and, provides the necessary information for shareholders to assess the Group s position and performance, business model and strategy. C.3.5 The Audit Committee has reviewed whistleblowing procedures including the reporting and follow-up of any concerns by employees regarding possible improprieties in matters of financial reporting, other fraudrelated matters and bribery. Our Code of Ethics and Behaviours (a copy of which is on our website) outlines the behaviours that M&S expects of its employees and advises them to report any concerns or suspected wrongdoing by the Company, colleagues or others involved with the Company, by reporting it to a manager, calling a confidential employee helpline or reporting it to the Group Secretary, as the Independent Internal Individual. C.3.6 The Audit Committee ensures that the internal audit department is adequately resourced and continues to have appropriate standing within the Group, and to keep its members independence and objectivity under review. During the year the Committee reviewed and debated the risk profile, and remained focus on the audit, assurance and risk processes within the business. Internal Audit & Risk comprises both the Group Risk function and Internal Audit. Group Risk facilitates and manages the risk process that is ultimately owned by the Group Board. Internal Audit, accountable to the Audit Committee, uses a risk-based approach to provide independent assurance over the adequacy and effectiveness of the control environment, including controls related to key risks on the Group Risk Profile. C.3.7 The Audit Committee has primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditors. As authorised by shareholders at the 2015 AGM, the Audit Committee determines the level of remuneration for the external auditors on behalf of the Board. Details of this year s fees are given in note 4 page 96 to the financial statements in the Annual Report. Tenure of Auditor At the 2015 AGM, shareholders approved the re-appointment of Deloitte as the Company s Statutory Auditor. Deloitte were appointed in 2014 following a tender process. C.3.8 The Audit Committee has assessed whether suitable accounting policies have been adopted and whether management have made appropriate judgements and estimates. Throughout the year the finance team has worked closely with the external auditor to ensure that the business is transparent and provides the required level of disclosure regarding the significant issues considered by the Committee in relation to the financial statements, as well as how these issues were addressed, whilst being mindful of matters that may be business sensitive. The main areas of judgement considered by the Committee during 2015/16 are presented on pages 44 and 45 of the Annual Report. The Audit Committee keeps under review the independence and objectivity of our external auditors, including the review of audit fee proposals and non-audit fees. The Committee reported on how the effectiveness of

13 Deloitte was assessed for the 2015/16 period. We believe their independence, the objectivity of the external audit and the effectiveness of the audit process are safeguarded and remained strong. The Committee judges our external auditors on the quality of their audit findings, management s response and stakeholder feedback. No decisions are taken by the external auditor in relation to the design of internal controls and they do not perform a management role in any of the work that they undertake. Their audit and non-audit fees are set, monitored and reviewed throughout the year (see note 4). We ensure that our auditor engagement policy, which is reviewed annually and disclosed on our website, is adhered to when non-audit work is commissioned. D REMUNERATION D.1 The Level and Components of Remuneration: Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance. We continue to be supportive of the drive to increase the transparency of executive remuneration report and to provide shareholder with greater influence over future policy. Our 2015 Remuneration Report is again split into two distinct sections. Our remuneration policy is set out on pages of the Annual Report. For shareholder transparency, we have continued to include a summary of the remuneration policy in this year s Annual Report, even though we are not seeking shareholder approval for our policy. Pages 60-61provide information on the policy since its approval at last year s AGM. Pages describe the implementation of the remuneration policy during 2014/15 and for the forthcoming year. Our remuneration framework is designed to support and drive our strategy, and ensure our business is run by high-quality leaders with the skills and expertise necessary to deliver our long term business priorities within a framework that is aligned with the interests of the Company s shareholders. Our remuneration strategy continues to ensure that a significant percentage of the package remains at risk. We believe that our remuneration policy provides appropriate incentives to reward performance that protects the long term interests of our stakeholders, and helps to deliver our strategy to become a leading international, multi-channel retailer. The Committee also has a particularly strong focus on the remuneration for employees below Board level when determining remuneration for executive directors. D.1.1 Performance-related elements of remuneration form a significant proportion of the total remuneration package of executive directors. The indicative values of the remuneration packages for each executive director (salary, pension, annual cash bonus and long-term incentives based on fixed, target and maximum scenarios) are given on page 61 of the Annual Report. D.1.2 We recognise that executive directors may be invited to become non-executive directors of other companies and that these appointments can broaden their knowledge and experience, to the benefit of M&S. The individual director retains the fee, details of which are disclosed on page 73 of the Annual Report. D.1.3 The fees paid to our non-executive directors recognise the responsibility of the role, the time commitments required and are not performance related nor pensionable. Non-executive directors do not participate in any of the Company s share schemes nor the Annual Bonus Scheme.

14 The basic annual fee which includes membership of committees is 70,000 per annum. The additional fee for acting as Chairman of the Audit or Remuneration Committees is 15,000 and the Senior Independent Director receives a fee of 100,000. Each of the non executive director fees are disclosed on page 74 of the Annual Report. D.1.4 The Remuneration Committee carefully considers commitments made to directors in respect of remuneration which would impact on early termination. The Company retains the right to terminate the contract of any executive director summarily, in accordance with the terms of their service agreement, on payment of a sum equivalent to the contractual notice entitlement of 12 months salary and specified benefits. In line with best practice for all current executive directors, the Company reserves the right on termination to make phased payments which are paid in monthly instalments and subject to mitigation. Entitlement to participate in future share schemes ceases on termination. Further details of the Company s termination policy are detailed of pages of the Annual Report. All share awards granted in 2013 and onwards are subject to malus provision. Under the terms of these provisions, the Committee has discretion to reduce, cancel or impose further conditions on unvested awards in circumstances it considers appropriate, including for example, a material misstatement of the Company s audited results. As detailed on page 60, clawback provisions will be introduced as part of the replacement share scheme rules at this year s AGM. These clawback provisions will apply to payments made under the 2015/16 annual cash bonus and any future cash bonus awards and to awards made under the executive share schemes in 2015 and onwards. These provisions will allow the Committee in certain specified circumstances to reclaim awards paid to individuals for up to three years after payment. The specified events include gross misconduct or where a material misstatement of the Company s financial statements has occurred. D.1.5 All executive directors and senior managers have rolling service contracts which can be terminated by the Company giving 12 months' notice and by the employee giving six months' notice. Exceptions may exist where new recruits have been granted longer notice periods for the initial period of their employment, reducing to twelve months. The Chairman has an agreement for service which can be terminated on six months notice by either party. Non-executive directors have agreements for service with the Company for an initial three-year term, which can be terminated on three months notice by either party. Details of each executive director s and non-executive director s contract terms are set out on pages 73 and 74 respectively of the Annual Report. D.2 Procedure: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. D.2.1 The Remuneration Committee currently comprises three independent non-executive directors Vindi Banga (Chairman), Miranda Curtis, and Robert Swannell. The Committee met 6 times during the year under review. The Committee attendance table can be found on page 53 of the Annual Report. The Remuneration Committee s terms of reference which is available on our website. An overview of what the Committee has done during the year, along with how their performance was rated, is provided on pages of the Annual Report. The Group Secretary acts as secretary to the Committee and ensures that it receives information and papers in a timely manner to enable full and proper consideration of agenda items agreed in advance in its annual

15 meeting planner. The Committee seeks independent external advice as necessary, and the services of Deloitte and PwC were used during the year. On the appointment of Deloitte as external auditors, a transition plan was put in place while a new Committee advisor was selected. PwC were appointed in 2014 by the Committee as its independent advisors following a rigorous and competitive tender process. PwC provide independent commentary on matters under consideration by the Committee and updates on legislative requirements, best practice and market practice. The Committee also seeks internal support from the Group Secretary, Director of Human Resources and Head Reward & Global Mobility, all of whom may attend the Committee meetings by invitation but are not present for any discussions that relate directly to their own remuneration. The Committee also reviews external data produced through a number of surveys and bespoke benchmarking data, including those published by Aon Hewitt (through the New Bridge Street consultancy), KPMG, PwC and Towers Watson. D.2.2 The Remuneration Committee's primary role is to recommend to the Board the senior remuneration strategy and framework, giving due regard to the financial and commercial health of the Company and to ensure the executive directors and senior management are fairly rewarded for their individual contributions to the Company's overall performance. D.2.3 directors. The remuneration of the non-executive directors is determined by the Chairman and the executive D.2.4 Shareholders are invited specifically to approve all new long-term incentive schemes. E. RELATIONS WITH SHAREHOLDERS E.1 Dialogue with Institutional Shareholders: There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Communication We are committed to ongoing engagement with shareholders and have a well established cycle of communication based on the Group s financial reporting calendar. This includes our preliminary results in May, Annual Report in June, half year results in November and Trading updates in January and July. We are very keen to understand the views of all our stakeholders and ensure open dialogue throughout the year, not just ahead of the AGM season. We had another full agenda in 2015/16. The business had over 431 contacts with over 253 separately identifiable institutions, in the form of one-to-one or group meetings hosted by an executive director or our Investor Relations team. In addition to the AGM, we also engaged with a number of leading private client brokers who typically represent our retail investor base. We hold an annual governance event at our head office in June each year, providing an opportunity to meet a significant number of our largest investors, representatives from the influential investor advisory companies and key industry governance specialists. In 2016, the event will be hosted by Robert Swannell, Chairman, with Vindi Banga, Senior Independent Director and Chairman of the Remuneration Committee, Andy Halford (Chairman of our Audit Committee), Amanda Mellor (Group Secretary and Head of Corporate Governance) and Adam