PV Crystalox Solar plc

corporate governance statement

Compliance

The Board is firmly committed to ensuring that high standards of corporate governance are maintained by the Group. Throughout the year ended 31 December 2011, the Group complied with the provisions set out in the United Kingdom Corporate Governance Code (June 2010) ("the Code") except that the Group did not comply with certain provisions relating to board and committee composition during the year, namely sections B.1.2, C.3.1 and D.2.1.

Under the Code a smaller company is defined as one that is below the FTSE 350 throughout the year immediately prior to the reporting year. The Company was a member of the FTSE 350 until 16 March 2010 and as such is not considered a smaller company for the 2011 reporting year. However, the Company will be considered to be a smaller company for the 2012 reporting year. As a smaller company the Company would be fully compliant with the Code.

Section B.1.2 states that except for smaller companies, at least half of the Board, excluding the Chairman, should comprise non-executive directors determined by the Board to be independent. A smaller company should have at least two independent non-executive directors. The Board recognises that during the year, the Group did not have a majority of independent non-executive directors. The Board consisted of three executive directors, two independent non-executive directors and the Chairman who is a non-executive director and was deemed to be independent on appointment but is not considered to be independent under the Code. The directors consider the current structure appropriate having regard to the size of the organisational structure of the Group.

Section C.3.1 states that the Board should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience. All three non-executive directors are members of the audit committee, however only two are considered independent under the Code. The Chairman is one of the members and was considered to be independent on appointment. The directors at present consider the current structure appropriate having regard to the size of the organisational structure of the Group.

Section D.2.1 states that the Board should establish a remuneration committee of at least three, or in the case of smaller companies two, independent non-executive directors. In addition the Company Chairman may also be a member of, but not chair, the committee if he or she was considered independent on appointment as Chairman. All three non-executive directors are members of the remuneration committee, however only two are considered independent under the Code. The Chairman is one of the members and was considered to be independent on appointment. The directors at present consider the current structure appropriate having regard to the size of the organisational structure of the Group.

Board of directors

The Board is primarily responsible for the success of the Group by providing leadership within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board sets the Group's strategic aims, ensures that the necessary financial and human resources are in place for the Group to meet its objectives and reviews management performance. The Board sets the Group's values and standards and ensures that its obligations to its shareholders and others are understood and met.

Matters reserved for the Board

The Board has a formal schedule of matters reserved to it for its decision. This schedule is reviewed annually and includes approval of:

Group objectives, strategy and policies;
business planning;
substantial transactions, contracts and commitments;
review of performance;
risk assessment;
dividends;
appointments to the Board and as Group Secretary; and
senior management appointments and succession plans.

Other specific responsibilities are delegated to Board committees, which operate within clearly defined terms of reference. Details of the responsibilities delegated to Board committees are given on pages 28 to 39 of the Annual Report 2011.

Board balance and independence

The Board comprises the non-executive Chairman, two non-executive directors and three executive directors. With the exception of the Chairman, who is presumed under the Code not to be independent, the Board considers all the non-executive directors to be independent. John Sleeman is the recognised Senior Independent Director who is available to shareholders if they have any relevant issues or concerns. Brief biographical details of all members of the Board are set out on page 21 of the Annual Report 2011 and further information concerning the appointments is set out in the Directors' Report.

The non-executive directors bring a wide range of commercial and financial experience and knowledge and are independent of management and any business or other relationship that could interfere with the exercise of their judgement. This provides a balance whereby an individual or small group cannot dominate the Board's decision-making.

The non-executive directors entered into arrangements for initial three year periods and their appointments continue subject to re-election at each AGM or six months' notice in writing from either party. The terms and conditions of appointment of the non-executive directors can be inspected at the Company's registered office and will be available for inspection at the Annual General Meeting. Maarten Henderson and John Sleeman were appointed on 11 June 2007 and Michael Parker was appointed on 1 January 2010.

The Board has established a separate nomination committee and details of its responsibilities and activities are on pages 28 and 29 of the Annual Report 2011.

Board meetings

The Board meets at least six times per annum and at other times according to business requirements. During 2011 there were ten meetings, including two meetings in May 2011 and in October 2011, where the Board met offsite to consider the Group's strategy and to review key business issues. Meetings are held in central London and at the Group's operating subsidiaries: at Abingdon in the United Kingdom; and at Erfurt and Bitterfeld in Germany. When the Board meets at the Group's operating subsidiaries the Board will have a detailed presentation from the subsidiary directors at that location and an opportunity to review the operation and to meet local management. During 2011 the number of Board and committee meetings with individual attendances was as follows:

	Board	Audit	Remuneration	Nomination
Hubert Aulich	10	3	4	3
Iain Dorrity	10	3	4	3
Peter Finnegan	10	3	4	3
Maarten Henderson*	10	3	4	3
Michael Parker*	10	3	4	3
John Sleeman*	10	3	4	3

* Non-executive directors.

Board support

All directors have access to advice and services from the Group Secretary. The appointment and removal of the Group Secretary is a matter for the Board as a whole. The Group Secretary is responsible for advising the Board on all governance matters, ensuring Board procedures are followed and applicable rules and regulations are complied with. The directors are free to seek any further information they consider necessary and directors can obtain independent professional advice at the Group's expense.

Information, induction and professional development

The Chairman, assisted by the Group Secretary, is responsible for ensuring that the Board receives appropriate and timely information on all relevant matters.

On appointment to the Board, new directors receive background reading about the Group and details of Board procedures and other governance related matters. In addition, the directors participate in a comprehensive induction programme, including site visits to the Group's operations and meetings with the executive directors and senior management across the Group.

The Chairman regularly reviews and agrees with each director their training and development needs as part of the succession planning process. Directors receive ongoing training and updates on relevant issues as appropriate, taking into account their individual qualifications and experience. The Group Secretary helps directors undertake any other professional development they consider necessary to assist them in carrying out their duties.

Chairman and Chief Executive

The roles of Chairman and Chief Executive Officer are separated and their responsibilities are clearly established. The Chairman is responsible for the leadership and workings of the Board and ensuring its effectiveness and the Chief Executive Officer together with the executive directors are responsible for the implementation of strategy and policies and the day-to-day decision-making and administration.

Other significant commitments of the Chairman, Maarten Henderson, are set out in the Directors section on pages 20 and 21 of the Annual Report 2011. The Board is satisfied that these commitments do not restrict him from carrying out his duties as Chairman effectively.

Performance evaluation

The directors believe that an effective Board is vital to the success of the Group and, as a result, undertake a thorough evaluation each year in order to assess how well the Board, its committees, the directors and the Chairman are performing. The aim is to improve the effectiveness of the Board, its committees and ultimately the Group's performance. The process is led by the Chairman and is supported by the Group Secretary and the Senior Independent Director. The Board believes that a combination of external reviews every third/fourth year with internal reviews in the other intervening years is the most appropriate method for evaluating effectiveness. The Board conducted an external evaluation for the 2008 Annual Report and intends to carry out an external review for the 2012 Annual Report.

The performance of individual directors was evaluated by the Chairman and the other non-executive directors. Following the review process, the Chairman concluded that each director continues to make an effective contribution to the work of the Board, is well prepared and informed concerning items to be considered by the Board, has a good understanding of the Group's businesses and that their commitment to the role remains strong.

The Senior Independent Director together with Michael Parker and the Chief Executive Officer evaluated the performance of the Chairman and concluded that the Chairman operated effectively in his role.

The Board carried out an internal evaluation of its effectiveness during a structured discussion at a board meeting in February 2012. The process was led by the Chairman with the assistance of the Group Secretary. The discussion focussed on: the Board's roles and responsibilities; the Board's culture and dynamics; the Board's processes; and the role of the Chairman. The review concluded that the Board was operating in an effective manner. It identified a number of significant strengths and it also identified some areas where changes could be made to improve longer-term effectiveness. These areas identified in the review are to be addressed in 2012 by an action plan developed by the Board.

The audit, nomination and remuneration committees carried out internal evaluations of their effectiveness at meetings in February and March 2012. The process for each review was similar to that used for the Board's effectiveness review. The reviews concluded that each committee was operating in an effective manner. Each review identified a number of strengths and some areas where changes could be made to improve longer-term effectiveness.

Relations with shareholders

The Board values the views of its shareholders and recognises their interest in the Group's strategy and performance, Board membership and quality of management.

The AGM is used to communicate with investors and documents are sent to shareholders at least 20 working days before the meeting. The Chief Executive makes a presentation there on the Group's progress. The Chairman, Chief Executive, Chief Financial Officer, Executive Director German Operations and the chairmen of the audit committee and remuneration committee are available to answer relevant questions. Separate resolutions are proposed on each substantial issue so that they can be given proper consideration and there is a resolution to receive and consider the Annual Report and financial statements. The Group counts all proxy votes and will indicate the level of proxies lodged on each resolution, after it has been dealt with by a show of hands.

The totals of proxy votes on each resolution, including details of any votes withheld, are announced at the meeting after each resolution has been dealt with on a show of hands and the full proxy voting results are announced through a regulatory news service and on the Company's website. In the event of a close result as indicated by the proxies held by the chairman of the meeting, the chairman would call a poll but this has not proved necessary at any of the AGMs to date. The Board believes that the immediacy of voting on a show of hands with the proxy votes immediately being announced, rather than a laborious process of conducting a formal poll on every resolution, is appreciated by the shareholders who attend the meeting.

During the year the executive directors maintained a regular programme of visits and presentations to major institutional shareholders both in the United Kingdom and overseas. The Chairman and the Senior Independent Director, who participate in this programme as appropriate, met with a number of major shareholders to discuss the introduction of the performance share plan before the 2011 AGM and reported the views of these shareholders to the Board. All directors receive copies of analysts' reports on the Group's and are updated by the Group's financial advisors on investors' perceptions of PV Crystalox Solar.

There were formal presentations following the preliminary and interim results and in addition the Group released Interim Management Statements in May and October 2011 and a trading update in June 2011.

Key announcements, financial reports, the presentations referred to above and other information about the Group can be found on the Group's website at www.pvcrystalox.com.

Accountability

The Board aims to present a balanced and understandable assessment of the Group's position and prospects in all reports and other price sensitive disclosures, reports to regulators and information required to be presented by statute. The responsibilities of the directors as regards the financial statements are described on page 40 of the Annual Report 2011 and that of the auditors on page 41 of the Annual Report 2011. A statement on going concern appears on pages 13 and 14 of the Annual Report 2011.

Remuneration committee

The Directors' remuneration report and details of the activities of the remuneration committee are on pages 32 to 39 of the Annual Report 2011. It sets out the Group's policy and the full details of all elements of the remuneration package of each individual director.

Nomination committee

The nomination committee of the Board comprises Maarten Henderson, Chairman of the Committee, John Sleeman and Michael Parker. It is appointed by the Board and is made up of at least three members, a majority of whom should be independent non-executive directors. The Chief Executive Officer, the Chief Financial Officer, other directors and external advisors may be invited to attend meetings as and when appropriate. The Group Secretary acts as the Secretary of the committee. The terms of reference of the nomination committee are available to members of the public upon request and are available on the Group's website at www.pvcrystalox.com. The nomination committee meets not less than twice a year and is required to report formally to the Board on its proceedings.

The main responsibilities of the nomination committee are to:

review regularly the structure, size and composition (including the skills, knowledge, experience and diversity) required of the Board compared to its current position and make recommendations to the Board with regard to any changes;
give full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Group and what skills and expertise are therefore needed on the Board in the future;
be responsible for identifying and nominating for the approval of the Board candidates to fill Board vacancies as and when they arise; before appointment is made by the Board, evaluate the balance of skills, knowledge, experience and diversity on the Board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment;
for the appointment of a chairman, the committee should prepare a job specification, including the time commitment expected. A proposed chairman's other significant commitments should be disclosed to the board before appointment and any changes to the chairman's commitments should be reported to the board as they arise;
prior to the appointment of a director, the proposed appointee should be required to disclose any other business interests that may result in a conflict of interest and be required to report any future business interests that could result in a conflict of interest;
keep under review the leadership needs of the Group, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace;
review the results of the board performance evaluation process that relate to the composition of the board;
keep up to date and fully informed about strategic issues and commercial changes affecting the Group and the market in which it operates;
review annually the time required from non-executive directors. Performance evaluation is used to assess whether the non-executive directors are spending enough time to fulfil their duties; and
ensure that on appointment to the Board, non-executive directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside Board meetings.

The nomination committee is also required to make recommendations to the Board concerning:

the formulation of plans for succession for both executive and non‑executive directors and in particular for the key roles of Chairman and Chief Executive Officer;
suitable candidates for the role of Senior Independent Director;
membership of the audit and remuneration committees, in consultation with the chairmen of those committees;
the re‑appointment of any non‑executive director having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required;
any matters relating to the continuation in office of any director at any time including the suspension or termination of service of an executive director as an employee of the Company subject to the provisions of the law and their service contract; and
the appointment of any director to executive or other office other than to the positions of Chairman and Chief Executive Officer.

The nomination committee met three times during the year. Details of attendance are shown in the Corporate Governance Statement on page 27 of the Annual Report 2011.

During the year the main items considered were:

review of the structure, size and composition of the Board;
organisational changes and senior appointments within the Group;
succession planning for directors and senior managers within the Group;
the nomination committee effectiveness review;
a review and recommendation of changes to the terms of reference of the nomination committee to the Board; and
a review of the knowledge, skills and experience of the directors proposed for annual re‑election at the AGM.

Audit committee

The audit committee of the Board is chaired by John Sleeman and is to be made up of a minimum of two members where a majority of the members shall be independent non‑executive directors, at least one of whom shall have recent and relevant financial experience. The committee is made up of three members, the two independent non‑executive directors, John Sleeman and Michael Parker and Maarten Henderson, the Chairman of the Board, who was considered to be independent on appointment. John Sleeman is a Chartered Accountant and a Chartered Banker who since 2006 has been a founding partner of S.P. Angel Corporate Finance LLP. Maarten Henderson is a finance professional who has held several CFO roles. He was chairman of the audit committee until his election to chairman of the Board of freenet AG in July 2011 and his most recent executive role as a CFO ended in October 2007. The Board considers that these two members have recent and relevant financial experience. Michael Parker, a former CEO of both The Dow Chemical Company and BNFL, brings many years of international commercial experience to the committee. The Board believes that this combination of professional experience is appropriate to fulfil the duties of the committee.

The Chief Financial Officer, the other directors and the external auditor may be invited to attend audit committee meetings as and when appropriate. The Group Secretary acts as the Secretary of the committee. The terms of reference of the audit committee are available to members of the public upon request and are available on the Group's website at www.pvcrystalox.com. The audit committee meets not less than three times a year and is required to report formally to the Board on its proceedings.

The main responsibilities of the audit committee include:

overseeing the Group's financial reporting process and monitoring the integrity of the financial statements and formal announcements relating to the Group's financial performance;
reviewing significant financial reporting issues and accounting policies and disclosures in financial reports;
reviewing the effectiveness of the Group's internal control procedures and risk management systems;
reviewing the Group's arrangements for whistleblowing, detecting fraud and preventing bribery;
reviewing the requirement for an internal audit function;
overseeing the Board's relationship with the external auditors;
reviewing and monitoring the external auditors' independence and objectivity and the effectiveness of the audit process; and
making recommendations to the Board on the appointment or re‑appointment of the Group's external auditors.

Independence of the external auditors

The Group's external auditors are PricewaterhouseCoopers LLP ("PwC") and the Committee operates a policy to safeguard the independence and objectivity of the external auditors. This policy requires approval of non‑audit services provided by the external auditors in advance, with the requirement that on an annual basis the total fees for non‑audit services do not exceed the total annual fees for audit services; sets out certain disclosure requirements by the external auditors to the Committee; places restrictions on the employment of the external auditors' former employees; and partner rotation. During the year, the Committee reviewed the processes that the external auditors have in place to safeguard their independence and received a letter from them confirming that, in their opinion, they remained independent.

A breakdown of the fees paid to the external auditors in respect of audit and non‑audit related work is included in Note 5 of the financial statements. Having undertaken a review of the non‑audit related services provided during the year, the Committee is satisfied that these services did not prejudice the external auditors' independence.

Work undertaken during the year

The audit committee met three times during the year. Details of attendance are shown in the Corporate Governance Statement on page 27 of the Annual Report 2011.

During the year the main items considered were:

discussions with the auditors on the audit approach and strategy, the audit process, key issues arising out of the audit and discussions on the Audit Report;
approval of the audit fees and the auditor's letter of engagement;
considering the independence and objectivity of the external auditors;
reviewing the internal controls and risk management systems in operation within the Group;
consideration of the requirement for the Group to have an internal audit function;
detailed reviews of the Group's preliminary announcement, Annual Report, Interim Reports and interim management statements;
the audit committee effectiveness review; and
a review and recommendation of changes to the terms of reference of the audit committee to the Board.

Internal controls and risk management systems

The Board has overall responsibly for the Group's system of internal control and risk management systems and for reviewing its effectiveness. The Board delegates to executive management the responsibility for designing, operating and monitoring both the systems and the maintenance of effective internal control in each of the Group's operating subsidiaries. The internal controls and risk management systems are designed to meet the particular needs of the Group and the risks to which it is exposed and are designed to manage rather than eliminate risk. Accordingly they can provide only reasonable and not absolute assurance against material misstatement, losses, fraud or breaches of laws or regulations.

Executive management is responsible for establishing and maintaining adequate internal control and risk management systems relating to the financial reporting process and the Group's process for the preparation of consolidated accounts. The systems and controls in place include policies and procedures that relate to the maintenance of records that accurately and fairly reflect transactions and accurately record and control the Group's assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards ("IFRS"); require representatives of the operating subsidiaries to confirm that their reported information gives a true and fair view of the state of affairs of the subsidiary and the results for the period; and review and reconcile reported results.

The key procedures, which exist to provide effective internal controls and risk management systems, are as follows:

clear limits of authority;
a comprehensive system for consolidating financial results from Group companies and reporting these financial results to the Board;
annual revenue, cash flow and capital forecasts reviewed regularly during the year, monthly monitoring of management accounts and capital expenditure reported to the Board and monthly comparisons with forecasts;
financial controls and procedures;
clear guidelines for the authorisation of significant transactions including capital expenditure and disposals under defined levels of authority;
regular meetings of the executive directors;
an audit committee, which approves audit plans and published financial information and reviews reports from external auditors arising from the audit and deals with significant control matters raised;
regular Board meetings to monitor continuously any areas of concern;
annual review of risks and internal controls; and
annual review of compliance with the Code.

The Board has reviewed the operation and effectiveness of the Group's system of internal control, including financial, operational and compliance controls and risk management systems which were in place during the financial year ended 31 December 2011 and the period up to the date of approval of the financial statements. The Group Secretary, who is a Chartered Accountant, led the review. The review was summarised into a report which was discussed by the audit committee and the Board in March 2012.

The Board confirmed that no significant weaknesses were identified in relation to the review conducted during the year. It did identify some areas where changes could be made to improve longer‑term effectiveness and actions are to be undertaken during 2012 to improve these controls.

The Board confirms that the an ongoing process for identifying, evaluating and managing the significant risks faced by the Group is regularly reviewed by the Board in accordance with the Turnbull Guidance on internal control.

The Board has considered the need for an internal audit function but has decided that the size of the Group does not justify it at present. The Board will keep the decision under annual review.

By order of the Board

Matthew Wethey

Group Secretary

27 March 2012

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