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Statement of Corporate Governance and S172(1) Statement

Financial year ended 31 December 2019


Statement of corporate governance arrangements

As a family owned business, we run our business in a way consistent with an agreed set of core values covering how we deliver value to shareholders and the wider community and how we interact with our stakeholders, including shareholders, employees, customers and suppliers. Accordingly, we have not applied a specific corporate governance code during 2019. The Board will monitor the development of private company corporate governance before deciding, in conjunction with the shareholders, whether it would be beneficial to formally adopt a specific corporate governance code such as the Wates Principles. Our corporate governance arrangements are as follows:

Purpose and leadership

The Group’s mission statement was set by our founder, Sir Arnold Clark, and is “to provide exceptional value for money and the highest levels of customer service”.

The Board sets our overall strategy and values and formally meets on a quarterly basis to monitor performance against that strategy. The Group’s values are embedded in its operations and reinforced during induction for new employees and at regular Director led branch and departmental meetings across the Group. Employee feedback helped to create five core values: Family, Communication, Progression, Community and Recognition. These are the values that guide and inform everything we do and reflect our principles as a business. The Group has a zero-tolerance approach on bribery and corruption, tax evasion and modern slavery. Breach of the Group values is a disciplinary matter where appropriate. The Board holds regular meetings with groups of local managers to seek feedback on trading conditions and the effectiveness of the Group’s overall strategy.

Board composition

The Board comprises the Chairwoman, six Executive Directors and one Non-Executive Director. Each Executive Director has clear responsibility for separate parts of the business.

The Board are supported by an Operations Board made up of individuals from a wide range of backgrounds, skills and experience. Executive Directors hold regular operational meetings with their respective leadership teams and meet the Operations Board on a weekly basis to monitor business performance and agree required actions after which an informal meeting of Executive Directors considers appropriate responses and actions. The Board meets quarterly to discuss longer term strategy with additional six monthly strategy meetings held with the Operations Board.

Appointments to the Board are discussed with the Chairwoman prior to any appointment being confirmed.

Director responsibilities

The Board seeks to ensure that the necessary financial, legal and human resources are in place for the Group to be able to meet its objectives, to review management performance and to ensure that its obligations to its shareholders are understood and met. All Directors have a clear understanding of their roles and have access to the Group Legal Counsel for advice on their responsibilities or relevant regulation. This ensures the Board receives regular briefings on new regulations impacting the Group, including General Data Protection Regulation and the impact of adopting new accounting standards. The Board receive timeous information regarding the performance of the business throughout the working day.

Remuneration

The Group seeks to provide competitive remuneration packages that will attract and retain executives of the calibre required to take forward the Group’s strategy. Remuneration comprises a base salary, bi-annual discretionary bonus, dependent upon individual qualitative performance, and a competitive benefits package. The remuneration package of each Director is discussed and agreed by the CEO and with the Chairwoman as the senior family representative on the Board. Discussions with the Chairwoman take into account business performance and the level of change to employee remuneration.

Brexit

The UK left the European Union on 31 January 2020 and is in a transition period which is due to end on 31 December 2020. There is still significant uncertainty surrounding the terms of the ongoing relationship between the UK and the EU after this date. The outcome will be dependent on the trade negotiations between the two parties which will undoubtedly intensify as we approach the end of the transition period. Our Brexit risk principally arises around the impact on the supply chain and pricing for new vehicles and parts due to the effect of tariff and non-tariff barriers. Given the nature of our business, much depends upon the actions taken by manufacturers and distributors in response to those impacts. We have an open dialogue with our suppliers to ensure we understand the actions they plan to take to implement any changes arising from the negotiations. The Board continue to actively monitor the situation and, as the outcomes of the trading negotiations become clearer, we will take appropriate action as and when necessary.

Opportunity and risk

Led by the Chairwoman, the Board is responsible for generating long-term shareholder value by setting the Group’s strategic direction. The Board is responsible for approval of the Group’s risk appetite, determining the nature and extent of significant risks the Group is willing to take to achieve its objectives. The Board has established delegated authorities and controls to ensure efficient management of the Group’s operations. The Group uses the Internal Audit and Group Risk functions to assist its monitoring of performance and risk. The Board consider the principal risks to be those that could cause the greatest damage if not effectively evaluated, understood and managed. These principal risks are considered to be:

Risk Potential impacts Mitigating actions
Failure to meet customer expectations
  • Reputational damage
  • Reduced customer retention
  • Investment in quality used car stock
  • Customer service quality monitoring
  • Major investment in Head Office customer service resource
  • Trading Standards review
  • Mystery shopping
  • Reviewing customer feedback and altering Group processes to improve business efficiency
Failure to maintain relationships with manufacturers and finance providers
  • Reduced access to vehicles on franchise terms
  • Reduction in availability of funding
  • Increased focus on used car and aftersales markets
  • Maintaining a diverse source of vehicles and finance
  • Regular communication with manufacturers and finance companies
Adverse changes to manufacturer delivery systems that bypass the current dealer network
  • Negative impact on sales volume and margins
  • Reduction in customer engagement
  • Diversification of franchise partners
  • Regular discussions with manufacturers to understand their strategies
  • Improved product delivery efficiency
  • Investment in quality used car stock
  • Investment in IT systems to enable easier customer transactions with the Group
IT systems failure and data security
  • Business interruption or reduced operational efficiency
  • Reputational damage
  • Loss of revenue and profit
  • Testing of IT contingency plans
  • Investment in robust IT systems
  • Systems mirroring
  • Business continuity planning
Failure to attract and retain our skilled workforce
  • Loss of knowledge and experience
  • Reduction in customer service
  • Investment in our employees through training
  • Equal opportunities policy
  • Effective Board communication
  • Employee appraisal process
Legislative, regulatory and environmental changes and major business interruption
  • Loss of revenue and operating profit contributions
  • Supply chain disruption
  • Business continuity
  • Diversification of brands and services
  • Regular communication with manufacturers and finance companies
  • Investment in our people
  • Involvement with trade bodies and local authorities
  • Availability of significant cash balances and maintenance of alternative funding routes
  • Business interruption planning

Whilst not identified as a separate principal risk at the balance sheet date, the impact of Covid-19 on the business as a major incident risk is covered within the ‘Legislative, regulatory and environmental changes and major business interruption’ risk above.

Stakeholder relationship and engagement

The following disclosure describes how the Directors have had regard to the matters set out in Section 172(1) (a) to (f) and forms the Directors’ statement required under Section 414CZA of The Companies Act 2006:

Stakeholder group Why is it important to engage How management and/or Directors engaged What were the key topics of engagement What was the impact of the engagement including any actions taken
Customers Delivering exceptional customer service and genuine value for money is key to customer retention
  • Director led customer service quality sessions across all business units Customer satisfaction surveys are conducted throughout the Group and the results analysed by the Directors and at branch level Monitoring of complaint levels and root cause analysis of customer complaints
  • Quality of service
  • Product offering improvements
  • Ease of doing Business
  • Business efficiency
  • Improved communication
  • A more customer focused approach using Product Consultants and Product Geniuses
  • A focus on having the right product mix and ensuring that products and services meet individual customer needs
Employees Ensuring the business has the right culture and values is critical to the delivery of a first-class customer experience
  • Dedicated employee communication website and app updated daily with information on matters of concern to employees
  • Director attendance at regular departmental team meetings to enable two-way information flows and ensure that employee views are taken into account in making major decisions
  • Annual results and strategy presentations led by the Group Managing Director and Directors across the Business
  • Regular performance appraisals and performance-based bonus scheme
  • Annual employee recognition and service awards
  • Network and focus groups led by our People team
  • Dedicated training facilities and new employee induction course
  • Results of customer survey
  • Quality of training
  • Service improvement ideas
  • Annual results and performance
  • Employee reward mechanisms
  • A more engaged and valued workforce, delivering a higher standard of customer service
  • Employee remuneration and benefits are updated to reflect feedback
  • The Arnold Clark Group won Family Friendly Working Scotland 2019 Top Employer Award recognising our industry-leading flexitime initiative which encourages employees to enjoy a better work-life balance
  • Introduction of ‘Space’ – an employee portal for information, advice and support around mental, physical and financial health
Manufacturers Access to vehicles on franchise terms is important for our franchise businesses as well as our Contract Hire and daily rental business
  • Regular meetings between Directors and manufacturers’ senior management to ensure principal decisions are fully informed
  • Group Managing Director frequently meets with representatives from manufacturer partners
  • Monthly financial performance reporting
  • Attendance at manufacturer conferences
  • Impact of new emissions regulations on pricing and availability of stock
  • Impact of Brexit on pricing and availability of stock
  • New model developments and pricing
  • Franchise performance and customer satisfaction
  • Improved customer service by matching our detailed product knowledge with customer requirements
  • Expansion of franchise dealership network
  • Industry recognition which includes Dealer Group of the year award at the 2019 and 2020 AM awards
Finance providers Access to affordable finance is essential to ensure the ongoing viability of our Contract Hire and Daily Rental businesses and to enable customers to finance vehicle purchases
  • The Group Retail Finance and Leasing Director meets with finance company senior management on a regular basis
  • Quarterly review meetings are held with each finance provider
  • Monthly compliance reporting
  • Availability of finance and related interest rates
  • Impact of FCA review of motor finance market
  • Impact of Brexit on UK interest rates and availability of finance
  • Renewed finance facilities
  • Agreed business volume targets and related interest rates
  • Seminar with finance companies on how to implement FCA positions to the benefit of customers
Wider community Giving back to the community is one of our core values
  • Continued support of local schools, charities and sports teams
  • Providing young people placements and commitment to our apprenticeship programme
  • Taking part in charity events and fundraising using their network of contacts
  • Providing charities with the opportunity to engage with Arnold Clark employees and customers
  • Building a greater understanding of the needs of our employees and wider community
  • Giving young people from all backgrounds an equal opportunity
  • Giving charities of all sizes a fair chance at receiving support from the Group
  • Matching of charitable funds raised by employees
  • Sponsorship of major charitable events such as Cash for Kids, Pride and Kiltwalk
  • Invested in defibrillators across our branch network
  • 400 new apprenticeship placements provided with the Group in 2019
Regulators Compliance with regulatory requirements is essential for the long-term benefit of the Group
  • We are open and transparent in our dealings with regulators
  • We hold frequent meetings with our regulators to fully understand current practice and future developments
  • Trading Standards audit and review
  • Compliance record
  • Future regulatory developments
  • Improvements to processes and procedures
  • Renewal of primary authority arrangements with Trading Standards

Principal Decisions

We define principal decisions as both those that are material to the Group, but also those that are significant to any of our key stakeholder groups

In making the following principal decisions the Board considered the outcomes from its stakeholder engagement processes in addition to maintaining our reputation for high standards of business conduct and the need to act fairly between members of the Group.

Phoenix Car Company acquisition

In January 2019, the Board decided to acquire the trade and assets of The Phoenix Car Company at Linwood, near Paisley. The Directors engaged with manufacturers to ensure that the Kia, Hyundai, Mitsubishi and Honda franchises would be transferred as part of the acquisition. The Directors also took into account that the transaction would preserve all existing jobs.

Brexit

Prior to the original Brexit deadline of March 2019, the Board decided to advance the purchase of vehicles for the Hire Drive business and increase the level of parts stock held to mitigate any post Brexit availability issues.

The Board decided that no similar action should be taken in advance of the subsequent October 2019 Brexit deadline and ultimate withdrawal on 31st January 2020.

Appointment of Chief Financial Officer

After more than 20 years as Group Finance Director, Mr K J McLean decided to stand down from the role. Following discussions with shareholders, the Board decided to appoint Mr M W Harvey as Chief Financial Officer from mid-2020 after a suitable handover period. Mr K J McLean will remain on the Board.

Appointment of Auditors

Mr M W Harvey was formerly a partner at Ernst & Young LLP who were also the auditor of the Group. As engagement partner on the audit team, due to the conflict of interest with Mr Harvey’s proposed appointment, Ernst & Young LLP had to step down as auditors and the 2019 audit was put out to tender. The overall objective of the tender was to select the best auditor for the Group from a quality perspective, as the Group requires an audit of the highest standard in order to provide shareholders with the appropriate level of assurance. Following meetings with key management, receipt of proposal documents and a final presentation of their proposals, a recommendation to appoint Deloitte LLP was agreed by the Board in August 2019.