PRINCIPLES OF GOOD GOVERNANCE
International Power is committed to high
standards of corporate governance. In line with the Rules of the
UK Listing Authority, the following report explains how the Group
has applied the 'Principles of Good Governance' and Code of Best
Practice contained in the Combined Code and reports the Group's
compliance with the provisions contained in the Code.
The Board met on seven occasions during the year. A balance between
Executive and Non-Executive Directors underpinned the effectiveness
of the Company's Board. In addition to the Non-Executive Chairman,
the Board consists of three Executive Directors and three Non-Executive
Directors.
All of the Non-Executive Directors are considered
to be independent.
In accordance with the Combined Code and the
Company's Articles of Association, all Directors submit
themselves for re-election at least every three years and
newly appointed Directors are subject to election by
shareholders at the first opportunity after their
appointment. Newly appointed Directors receive
comprehensive briefing, and training where appropriate,
on the Company and their roles, to ensure that they
are fully conversant with their responsibilities.
The Board has responsibility for defining strategy, ensuring
the successful implementation of approved plans and for
the financial policies of the Group for which it maintains a
schedule of all matters requiring specific Board approval.
Throughout 2001 this included all strategy decisions and
significant capital investment proposals.
The Board receives information on capital expenditure
projects and investment proposals in advance of Board
meetings, as well as management reports on the
operational and financial performance of the business.
Financial performance is monitored on a monthly basis
and the overall performance of the Group is reviewed
against approved budgets.
All of the Directors have access to the advice and services
of the Company Secretary and have access to independent
advice should they so wish.
The Company has established the following committees:
the Audit Committee, the Remuneration and
Appointments Committee and the Risk Committee.
The Audit Committee
(comprising the Chairman and all Non-Executive Directors) is responsible
for monitoring the work of the internal audit function and its progress
against the Group's annual internal audit plan, and also reviews
reports from the external auditors. In addition to reviewing the
Group's accounts, results announcements and accounting policies,
the Committee monitors the effectiveness of internal control systems
for the Board. The Chairman of the Audit Committee is Tony Isaac.
The Remuneration and Appointments
Committee (comprising the Chairman and all Non-Executive
Directors) is responsible, on behalf of the Board, for monitoring
the performance of the Executive Directors of the Company and making
recommendations to the Board on remuneration, appointments and matters
of management succession. The Chairman of the Remuneration and Appointments
Committee is Dennis Hendrix.
The Risk Committee
(comprising the Chief Executive Officer, the Chief Financial Officer,
the Chief Operating Officer and senior managers) has responsibility,
on behalf of the Board, for monitoring the effectiveness of the
Group's risk management arrangements. The Committee is also responsible
for monitoring health, safety and environmental performance in the
Group. The Chairman of the Risk Committee is Philip Cox.
The Board is accountable to shareholders for the
performance and activities of the Group.
International Power ensures that its Annual General
Meeting (AGM) provides shareholders with an opportunity
to receive comprehensive information on all aspects of the
Group's business activities, and to question senior
management about business issues and prospects.
All proxy votes are counted and the level of proxy votes
lodged for each resolution is reported at the AGM. In line
with best practice, the Company aims to ensure that the
Notice of the AGM and the Annual Report are sent to
shareholders at least 20 working days before the AGM.
International Power also runs, within the terms of the regulatory framework,
frequent contact programmes with institutional investors, to discuss
matters of strategy and financial performance. All results presentations
and all Stock Exchange announcements are available to shareholders
on the Company's website, www.ipplc.com, in the investor relations
section.
The Board is mindful of its responsibility to present a
balanced and understandable assessment of International
Power's financial position and prospects, in all reports,
both to investors and regulatory authorities. The Annual
Report, interimand quarterly results are the principal
means of achieving this objective.
An explanation of the respective responsibilities of the Directors
and auditors in connection with the financial statements is set
out in Statement of Directors'
responsibilities. The Directors set out in
the Directors' report the basis for their view that the Group
is a going concern.
Systems are in place to meet the requirements of the
Combined Code and the Turnbull Guidance for the review
of internal controls, including financial, operational and
compliance controls and risk management.
The Board has responsibility for the Group's system of internal control and
for monitoring its effectiveness. Any system of internal control
is designed to manage, rather than eliminate, the risk of failure
to achieve business objectives. The system can only provide reasonable,
and not absolute, assurance against material financial misstatement
or loss. The principal features of the Group's systems of internal
control are:
The Board encourages a culture of integrity and openness. The
Company has an organisational structure with clear lines of accountability
and authority across its worldwide operations, supported by appropriate
reporting procedures. Each of the regional businesses is accountable
to the Chief Executive through the Chief Operating Officer and is
managed within the strategic guidelines and delegated authorities
adopted by the Board.
Control procedures have been established in each of the Company's
operations to safeguard the Group's assets from loss or misuse and
to ensure appropriate authorisation and recording of financial transactions.
Risk management procedures are in place for the Company's operations,
including its energy marketing and trading activities, which are
overseen by the Global Risk Manager. The Group treasury function
operates under defined policies and the Treasury Committee, chaired
by the Chief Financial Officer, monitors its activities. All acquisition
and development decisions are subject to disciplined investment
appraisal processes.
Corporate plan Executive
management submits an annual corporate plan to the Board for approval.
The plan for each business unit is the quantified assessment of
its planned operating and financial performance for the next financial
year, together with strategic reviews of the following four years.
Group Management review the plans with each operational team. The
individual plans are based on key economic and financial assumptions
and incorporate an assessment of the risks and sensitivities underlying
the projections.
Performance monitoring
Monthly performance and financial reports are produced for each
business unit, with comparisons to budget. Reports are consolidated
for overall review by executive management, together with forecasts
for the profit and loss account and cash flow. Detailed reports
are presented to the Board on a regular basis.
Performance review
Each business unit is subject to a performance review with Group
Management regularly during the year. Actual results are compared
to budget and to financial forecasts. Key operational and financial
metrics are reviewed together with the risk profile and business
environment of the reporting unit.
Investment projects
These are subject to formal review and authorisation procedures
with designated levels of authority. Major projects are subject
to Board review and approval.
There is a continuous process for identifying, evaluating
and managing the key risks faced by the Company.
Activities are co-ordinated by the Risk Committee, which
has responsibility for ensuring the adequacy of systems for
identifying and assessing significant risks, that appropriate
control systems and other mitigating actions are in place,
and that residual exposures are consistent with the
Company's strategy and objectives. Assessments are
conducted for all material entities.
As part of the annual business planning process, the key
risks associated with achievement of principal objectives are
identified and their impact quantified. During the year,
significant changes in the risk profile are highlighted
through the business performance reports. The principal
risks are reviewed by the Risk Committee, which provides
regular reports to the Board.
For each of the businesses that operate in traded energy markets, local risk
committees have been established to oversee the management of the
market, operational and credit risks arising from the marketing
and trading activities. These committees are chaired by the Global
Risk Manager and comprise Executive Directors and senior managers.
The principal objective of the Group's energy marketing
and trading operations is to maximise the return from
selling the physical output of its plants.
The Group hedges its physical generating capacity by
selling forward its output, and purchasing its input, as
and when commercially appropriate and within approved
control limits. This is accomplished through a range
of physical off-take and supply arrangements. Our limited
proprietary trading operations use a range of financial
and physical products.
Energy market risk on our asset and proprietary portfolios
is measured using value at risk and other methodologies.
Value at risk provides a fair estimate of the net losses
or gains which could be recognised on our portfolios
over a certain period and given a certain probability; it does
not provide an indication of actual results. It is routinely
checked for accuracy against actual movements in the
portfolio value.
In addition to using value at risk measures, we perform scenario analyses
to estimate the economic impact of sudden market movements on the
value of our portfolios. This supplements the value at risk methodology
and captures additional market risks.
The Board reviews the effectiveness
of established internal controls through the Audit Committee, which
receives reports from management, the Risk Committee, the Group's
internal audit function and the external auditors on the systems
of internal control and risk management arrangements.
Internal audit reviews the effectiveness of
internal controls and risk management through a work programme based
on the Company's objectives and risk profile. Findings are reported
to operational and executive management, with periodic reporting
to the Audit Committee.
Annual self-certification statements
of compliance with procedures are provided by business unit managers.
These statements give assurance that controls are in operation and
confirm that programmes are in place to address any weaknesses in
internal control. The certification process embraces all areas of
material risk. The internal audit function reviews the statements
and reports any significant issues to the Audit Committee.
At this stage of the Company's development, the Board
believes that the Chief Executive Officer's fixed three-year
service contract is appropriate, given his experience and
knowledge of the market in which the Group operates.
His remuneration is paid entirely in shares as described in
the Remuneration report. The service contracts for the
other Executive Directors reverted to a 12-month notice
on 2 October 2001.
In all other respects, the Company has complied with the
provisions of the Combined Code throughout the period
of the review.
We have considered the ABI guidelines on corporate social responsibility,
which were issued in October 2001. It is our intention to seek to
comply with them in our 2002 Annual Report.
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