Statement of Corporate Governance and S172(1) Statement

Financial year ended 31 December 2020


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 2020. 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

As of August 2020, S Willis stepped down from his operational roles but remains a member of the Board in a non-executive capacity. This ensures that the knowledge and experience gained over 25 years in his sales role remains available to the Board. At this point, J A Clark was appointed to the role of Group Commercial Director and R E Borrie to Group Sales Director. K J McLean, who had also planned to step down from his executive role in August 2020, agreed to remain as an Executive Director given the unprecedented impact of Covid-19 on the business.

The Board are supported by an Operations Board made up of individuals with 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 formally meets quarterly to discuss longer term strategy with additional bi-annual strategy meetings held with the Operations Board. However, reflecting the risks arising from Covid-19, the Executive Directors held a number of digital ad-hoc meetings, initially on a daily basis, to formulate and monitor the Group’s mitigation plans.

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 legal 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 timely 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 Chief Executive and 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.

Covid-19

Recognising the potential impact of Covid-19 on the Group, the Executive Directors held daily meetings, digitally, to assess the potential risks and implement and monitor the various mitigating actions. The principal decisions taken are set out below and regular update calls were held with the Chairwoman to ensure her support for all of the actions taken. Uncertainties remain over the duration of the pandemic, the effectiveness of measures taken to contain it and the resultant impact on customer demand, workforce availability and cash flows. As a consequence, the Directors continue to monitor the situation, ensuring that differing Government requirements are understood and complied with and that working capital exposures are appropriate.

Climate change

The far-reaching risks of climate change and its growing impact on both the environment and the global economy are well-documented and the Group recognises that the automotive sector has always been a significant contributor to global greenhouse gas emissions, especially through the growth in SUV use. The UK Government has confirmed its ambition to see the end of the sale of new petrol and diesel cars in the UK by 2030.

The Group’s position as a leading multi-franchise auto-retailer means it is ideally positioned to help drive significant change in the market. Board members continue to engage with manufacturer partners, investing in training of our staff in alternate fuel technology, and installing charging points at our sites where possible. The Directors Report contains commentary on the Group’s energy efficiency actions along with details of our greenhouse gas emissions.

Brexit

The UK left the European Union on 31 January 2020 and the transition period ended on 31 December 2020. Throughout 2020, there remained significant uncertainty surrounding the terms of the ongoing relationship between the UK and the EU. 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 and the subsequent impact on retail prices in the UK. The Executive Directors maintained an open dialogue with our key manufacturers and distributors throughout 2020 to ensure we understand the actions they planned to take to implement any changes arising from the end of the transition period. The potential pricing and supply issues and subsequent impacts on the retail market were regularly discussed by the Board and specific strategies around inventory levels were agreed. The Board were pleased that the UK Government announced a Brexit deal on 24 December 2020 which allows for tariff free trade between the United Kingdom and the European Union.

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 (including the risks arising from Covid-19 and Brexit)
  • Loss of revenue and operating profit contributions
  • Supply chain disruption
  • Business continuity
  • Non-compliance with FCA regulations leading to trading restrictions
  • Diversification of brands and services
  • Regular communication with manufacturers and finance companies
  • Development of our Digital Journey Click & Collect and Click & Deliver services
  • 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
  • Investment in Innovation Centre
  • Board level monitoring of FCA compliance

Stakeholder relationship and engagement

The following disclosure describes how the Directors have had regard to the matters set out in Section 1720) (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
  • Roll out of Click & Collect and Click & Deliver services
Employees Ensuring the business has the right culture and values is critical to the delivery of a first-class customer experience
  • Bi-weekly email from Chief Executive during Covid and Engagement with employees on:
  • Covid safety
  • 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
  • Changes to working practices during pandemic
  • Results of customer survey
  • Quality of training
  • Service improvement ideas
  • Annual results and performance
  • Employee reward mechanisms
  • Clear staff communication during Covid-19 through weekly/bi-weekly email from, Chief Executive
  • Roll out of Covid secure environments and supplies of ‘PPE’ and working from home arrangements
  • A more engaged and valued workforce, delivering a higher standard of customer service
  • Employee remuneration and benefits are updated to reflect feedback
  • ‘Space’ - an employee portal for information. advice and support around mental, physical and financial health
  • Ability to roll out our Digital Journey
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
  • Chief Executive 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
  • Manufacturer support during Covid 19 lockdown
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
  • Adoption of all FCA rates requirements
  • Agreed business volume targets and related interest rates
  • Finance provider support during Covid-19 lockdown
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
  • New apprenticeship placements within the Group
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
  • Compliance with relevant FCA requirements

Principal Decisions

The Board took the following principal decisions designed to mitigate the impact of Covid-19 on the business in order to protect the group’s cash position and to protect the health and safety of employees and other stakeholders:

  • Adherence to the guidance of the Government, the World Health Organisation and other authorities throughout the pandemic.
  • Temporary closure of our retail sites on 24 March 2020.
  • Reducing capital and discretionary expenditure.
  • Cancellation of proposed 1st half year bonuses, capping of salaries and agreement not to pay any dividends in 2020.
  • Temporary furloughing of over 12,000 of our employees with only certain key roles continuing, including those supporting the NHS and other key services noted above. The Group utilised the Coronavirus Job Retention Scheme to support payroll costs for furloughed employees. Our last furloughed employee returned to work in October.
  • Accelerated roll out of Click & Collect and Click & Deliver services.
  • The gradual return of the majority of our furloughed employees following the reopening of our sites and the related decision to reduce our overall level of headcount as a result of the changed working practices.
  • Leaving six smaller branches closed, reflecting the new market conditions, whilst continuing to open three new branches that were in development before lockdown.
  • Other Government support by way of the deferral of VAT payments and a business rates relief for retail premises has been utilised.
  • With agreement of our hire purchase funding providers, monthly instalment payments due between April and June 2020 were deferred. The majority of deferred amounts are being repaid over extended contract periods.
  • Not furloughing any staff as a result of the second lockdown in November and December 2020 as our financial position and revised operations were considered to be capable of continuing without additional UK Government support.



Brexit

Prior to the end of the transition period and following discussions with key manufacturers and distributors, the Board agreed to increase the level of certain parts stocks held. This was to mitigate any post transition availability issues.