The Group has a policy of seeking to comply with established best practice in the field of corporate governance as set out in the Combined Code (2008). It should be noted that the Group is not required to comply with the Combined Code. The following sets out the main principles of good governance in the Combined Code that have been followed by the Board and how those principles have been applied. The following disclosure is voluntary for the Group and indicates where appropriate relevant principles have been adopted. A statement as to the Group’s compliance with the Combined Code is made below.

The Board

The Group is controlled through its Board of Directors, which comprises those individuals set out in Directors and Company Secretary. The Board’s main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s strategic objectives and to ensure that the necessary financial and other resources are made available to enable them to meet those objectives.

The Board, which meets normally every month (except for August), has a schedule of matters reserved for its approval. Board papers are sent to all Directors in advance of each Board meeting including management accounts and accompanying reports from Executive Directors and other members of the senior management team. At each meeting the Board is briefed on issues arising, reviews the progress of the Group towards its objectives and monitors financial performance against budget and forecast. During the year the Board met 12 times at the Group’s offices. In nine cases all of the serving Directors attended the meetings. M. Rowan, M. Knight and P. Atherton were each unable to attend one meeting respectively.

The specific responsibilities reserved for the Board include: setting Group strategy and approving an annual budget and medium term projections; reviewing operational and financial performance; approving the material terms of any acquisition, investment, divestment or capital expenditure which has a value of over £25,000, reviewing the Group’s systems of financial control and risk management; ensuring that appropriate management development and succession plans are in place; reviewing the environmental, health and safety performance of the Group; approving appointments to the Board; approving policies relating to Directors’ remuneration and the severance of Directors’ contracts; and ensuring that a satisfactory dialogue takes place with shareholders.

Other than as set out above, operational control is delegated by the Board to the Chief Executive Officer or to such other person as the Chief Executive Officer shall determine. Non-Executive Directors are able to contact the Executive Directors at any time for further information.

Remuneration Committee

During the year, the Remuneration Committee comprised M. Knight (Chairman of the Committee), M. Rowan and D. Allen who was appointed in July 2009 (each a member of the Committee). The Committee met four times during the year at the Group’s offices. In all cases all serving members attended the meetings, by telephone where appropriate. When necessary non-Committee members were invited to attend. No Director is involved in deciding his or her own remuneration. The Committee’s principal responsibilities are the review and recommendation of the scale and structure of remuneration for senior management, including the award of share options.

The Committee’s terms of reference are publicly available on request or on the Group’s website.

The Combined Code specifies that it is the Board that must report on the remuneration of its members and not the Committee. This report is presented in the Directors’ Remuneration Report above.

Re-election of Directors

All Directors are subject to election by shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. The names of Directors submitted for election or re-election are accompanied by sufficient biographical details and any other relevant information to enable shareholders to take an informed decision on their election.

At the next Annual General Meeting, resolutions will be proposed to re-elect S. Searle and R. Cummings. Further details will be set out in the Notice of Annual General Meeting sent to all shareholders.

Audit Committee

During the year, the Audit Committee comprised M. Rowan (Chairman of the Committee) and P. Atherton (a member of the Committee). The Audit Committee met four times during the year with the auditors in attendance. All serving members attended the meetings. When necessary, non-Committee members were invited to attend.

The Audit Committee regularly reviews its functions against best practice with the assistance of the Group’s auditors. The Committee’s terms of reference are publicly available on request or on the Group’s website.

The Committee’s principal responsibilities are ensuring that the financial performance of the Group is properly reported on and monitored and reviewing the auditors’ reports relating to accounts and internal control systems. The Committee reviews at least annually the provision of non-audit services and monitors the auditors’ independence. In addition the Chairman maintains dialogue with the auditors outside the Audit Committee.

Given the Group’s size and development, the Board did not consider it necessary to have an internal audit function during the year. The Board will continue to monitor this requirement.

Nomination Committee

The Nomination Committee comprises of M. Knight (Chairman of the Committee), P. Atherton and M. Rowan (each a member of the Committee). The Committee’s principal responsibility is considering appointments to the Board. Before an appointment is made, the Committee evaluates the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepares a description of the role and capabilities required for a particular appointment. The Committee’s terms of reference are publicly available on request or on the Group’s website.

The Committee gives full consideration to succession planning 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 and from senior management in the future.

The Chairman does not chair the Nomination Committee when it is dealing with the appointment of a successor to the Chairmanship; in which case, the Committee is chaired by a Non-Executive Director elected by the remaining members.

The Nomination Committee did not meet during the period under review.

The roles of the Chairman and the CEO

The division of responsibilities between the Chairman of the Board and the Chief Executive Officer is clearly defined. M Knight, the Chairman, spends 1-2 days per week on the business of the Group. The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives. The Chairman is responsible for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman facilitates constructive relations between Executive and Non-Executive Directors, and ensures that Directors receive accurate, timely and clear information and also effective communication with shareholders.

The Chief Executive Officer has direct charge of the Group on a day-to-day basis and is accountable to the Board for the operational and financial performance of the Group.

Senior Independent Director

The Board does not currently believe it is appropriate to appoint a senior independent Non-Executive Director, given the Group’s size and development. The Board will keep this under review. The Board considers that the Chairman of the Audit Committee has the appropriate recent and relevant financial experience.

Directors and Directors’ independence

The composition and biographies of the Board of Directors at the date of this report are set out in Directors and Company Secretary. All of those Directors served throughout the period under review.

The Board currently comprises the Chairman, three Non-Executive Directors and three Executive Directors. The Non-Executive Directors constructively challenge, help develop proposals on strategy, bring strong, independent judgement, knowledge, and experience to the Board’s deliberations.

M. Knight, Chairman is not deemed to be an independent Non-Executive Director due to his position as Chief Operating Officer of Imperial College of Science, Technology and Medicine, the majority shareholder of the Group.

M. Knight, Chairman and P. Atherton and M. Rowan, each Non-Executive Directors, have options over Ordinary Shares of the Group as set out in the Directors’ Remuneration Report. Directors other than the Executive Directors may accept appointments as Directors of other companies and retain any related fees paid to them. M. Knight, P. Atherton, M. Rowan and D. Allen act as Directors of a number of private companies outside the Group.

The Executive Directors may accept external appointments as Non-Executive Directors of other companies with the prior consent of the Board and, where such appointment is to the board of one of the Group’s technology companies, they must vest in the Group any related fees paid to them.

M. Knight, P. Atherton and M. Rowan also serve on the boards of some of the Group’s technology companies, as set out in Note 28 and retain the related fees paid to them. P. Atherton and M. Rowan are also shareholders in the Group’s technology companies, as set out in Note 28.

P. Atherton, M. Rowan and D. Allen are independent from Imperial College of Science, Technology and Medicine, the majority shareholder of the Group. The Board considers P. Atherton, M. Rowan and D. Allen to be sufficiently independent to be classified as independent Non-Executive Directors.

The Directors are given access to independent professional advice at the Group’s expense when the Directors deem it is necessary in order for them to carry out their responsibilities.

All Directors have access to the advice and services of the Company Secretary who is responsible to the Board as a whole for ensuring that Board procedures are properly followed and that applicable rules and regulations are complied with.

The Group has adopted a code of dealings in securities of the Group which is considered appropriate for a company on AIM. The Directors comply with Rule 21 of the AIM Rules relating to Directors’ dealings and take all reasonable steps to ensure compliance by the Group’s ‘applicable employees’ (as defined in the AIM Rule).

Professional development

On appointment, a Director takes part in an induction programme where they receive information about the Group, the role of the Board and the matters reserved for its decision, the terms of reference and membership of the Board committees, the Group’s corporate governance practices and procedures, and the latest financial information about the Group. Throughout their period in office the Directors are continually updated on the Group’s business and the competitive and regulatory environments in which it operates. Directors are also advised on appointment of their legal and other duties and obligations as a Director of an AIM listed company and they are also updated on changes to the legal and governance requirements of the Group and upon themselves as Directors.

Board evaluation

The Board is mindful of the requirement to undertake an annual evaluation of its performance and that of its committees and individual Directors. The Board has adopted the following procedures in order to conduct Board performance evaluation.

The performance of the Board, its committees, the Executive Directors and the Non-Executive Directors is evaluated by the Chairman on an ongoing basis. The Chairman meets each of the Executive Directors regularly throughout the year. The Chairman conducts an annual formal performance appraisal of the Chief Executive Officer. The Chairman, in conjunction with the Chief Executive Officer, assesses annually the performance of the Chief Financial and Operations Officer, the Chief Investment Officer as well as the Company Secretary and other senior managers.

Re-election

All Directors are required to stand for re-election at the first Annual General Meeting following their appointment. In accordance with the Articles of Association, at every Annual General Meeting one third of the Board, who are subject to rotation, retire from office. Non-Executive Directors are appointed for a fixed term of a maximum of three years. At the end of the fixed term their suitability for re-appointment is considered. The terms and conditions are set out in their letter of appointment as detailed in the Directors’ Remuneration Report.

Relations with shareholders

The Board attaches great importance to communications with both institutional and private shareholders. In fulfilment of the Chairman’s obligations under the Combined Code on Corporate Governance, the Chairman gives feedback to the Board on issues raised with him by major shareholders. Regular communication is maintained with all shareholders through company announcements, the Annual Report and Accounts, Preliminary Results and the Interim Report.

The Directors seek to build a mutual understanding of objectives between the Group and its shareholders. Institutional shareholders are in contact with the Directors through presentations and meetings to discuss issues and to give feedback regularly throughout the year. With private shareholders this is not always practical. The Board therefore intends to use the Group’s Annual General Meeting (AGM) as the opportunity to meet private shareholders who are encouraged to attend the AGM when there is an opportunity to ask questions of the Directors on a formal and informal basis and to discuss development of the business.

The Group has been in compliance during the reported year and since the end of that year with the undertaking which it gave at the time of its fund-raising in November 2007 to its majority shareholder, Imperial College London, not to issue ordinary shares such that on a fully diluted basis the College’s shareholding should fall to 50% or less.

In addition the Group operates a website, which can be found at www.imperialinnovations.co.uk. The website contains the information about the Group that is required by AIM Rule 26. That information contains, amongst other information, details on the Group and its activities, the Group’s regulatory announcements, its Annual Reports and Interim Reports and details of the Group’s share price.

Internal control

It is the responsibility of the Directors and senior management to safeguard the value of the business and assets of the Group. Part of this responsibility requires the development of relevant policies and appropriate internal controls to ensure proper management of the Group’s resources and the identification of risks which might serve to undermine them.

The Board acknowledges that it has ultimate responsibility for the Group’s system of internal controls and for reviewing their effectiveness. However, the system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board complies with principle C.2 of the Combined Code on Corporate Governance in having a continuous process for identifying, evaluating and managing the significant risks the Group faces. This process has been in place throughout the year in review and up to the date of the approval of the Annual Report and Accounts. Appropriate members of staff are aware of the internal controls of the Group and the Group has adopted a whistle-blowing policy for all staff.

The Audit Committee, which was established by the Board, is chaired by M. Rowan and includes P. Atherton. The Audit Committee reviews the risk management and control processes and reports to the Board. The Audit Committee reached its recommendation to the Board that a resolution be put to shareholders to re-appoint the auditors after consideration of the Group’s policies and controls including its policy on using auditors for non-audit services.

The Board has reviewed the effectiveness of the material internal controls during the year. The key features of the internal control systems that operated throughout the period covered by the Financial Statements are set out below:

  • The Group prepares detailed budgets and working capital forecasts, which are based upon the strategy of the Group and are approved by the Board. Detailed management accounts are prepared each month and are compared to budgets, with any variances being investigated.
  • The Board monitors the activities of the Group through the supply of regular information from various areas of the business as set out in Board papers.
  • The Group has a structure with clearly drawn lines of accountability and authority. Employees are required to follow clearly laid out internal procedures and policies appropriate to the business and their position within the business.
  • The Group employs Directors and senior employees with the appropriate knowledge and experience.

Corporate and social responsibility

The principal activities of the Group are technology commercialisation and investments. During the year, the Group employed an average of 40 people. The Group aims to conduct its business in a socially responsible manner and in all its activities the Group aims to be commercial and fair, to maintain its integrity and professionalism and to respect the needs of its investors, employees and suppliers.

Part of the Group’s strategy is to improve the world by creating value from inventions made by Imperial College London and other complementary sources of intellectual property. The Group works in partnership with inventors, customers and co-investors and seeks to share reward fairly. There are circumstances where we consider intellectual property must be exploited with great sensitivity.

For example, the Group has supported the development of drugs that will help countries in the third world; specifically, the Group has helped to persuade pharmaceutical companies to supply drugs at modest cost to those countries.

The Group is involved in the development of technologies for a low carbon environment and waste recycling and, as such, employees are encouraged to propose new measures for the business in keeping with these programmes. For example, one of the Group’s portfolio companies, Novacem, will, if successful, contribute to the reduction of the world’s carbon emissions through its development of a cement that extracts carbon dioxide from the atmosphere.

Statement of Directors’ Responsibilities

A statement of the Directors’ responsibilities is set out in the Directors’ Report.

Going concern

After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.

Compliance with the Combined Code

During the year ended 31 July 2009, the Group has been in compliance with the requirements of the Combined Code on Corporate Governance except in the six areas listed below.

  1. M. Knight, Chairman is not deemed to be an independent Non-Executive Director due to his position as Chief Operating Officer of Imperial College of Science, Technology and Medicine, the majority shareholder of the Group;
  2. M. Knight, Chairman, and P. Atherton and M. Rowan, both independent Non-Executive Directors have options over Ordinary Shares of the Group as set out in the Directors’ Remuneration Report;
  3. The Group has not appointed a Senior Independent Non-Executive Director. The Board does not currently believe it is appropriate to appoint a Senior Independent Non-Executive Director, given the Group’s size and development. The Board will keep this under regular review;
  4. The remuneration of the Non-Executive Directors and the Chairman is determined by the Board, not by the Executive Directors and the Remuneration Committee respectively;
  5. The Remuneration Committee has not for part of the year comprised the requisite number, two, of independent Non-Executive Directors for a smaller company and its Chairman is also the Chairman of the Group.
  6. The Group does not have an internal audit function as it does not believe that this is necessary given the size of the Group.

Principal risks and uncertainties

The management of the business and the execution of the Group’s strategy are subject to a number of risks. Risks are formally reviewed by the Board and appropriate processes put in place to monitor and mitigate them. If more than one event occurs, it is possible that the overall effect of such events would compound the possible adverse effects on the Group. The key business risks affecting the Group are set out below:

Changes in legislation, government policy and the conditions that research sponsors attach to the provision of funding

The terms under which Imperial College London and other sources of intellectual property are available will affect the ability of the Group to exploit technology and may dilute the return to the Group. Changes to terms on which grant funding is given could impact on this, including changes to the terms upon which research is sponsored.

Imperial College London is incentivised to protect the intellectual property for the Group to exploit through the structure of the pipeline agreement which shares the return between Imperial College London, the Group and Imperial College London’s investors. We have mitigated this risk by embedding our activities in Imperial College London; assisting Imperial College London with its management of its intellectual property and with the negotiation with research contracts to ensure that the intellectual property is not unduly compromised. Imperial College London maintains close links with government to manage its position with respect to future legislative changes.

Loss of key personnel from the Group

The Group’s employees are highly qualified and the area in which the Group operates is a specialist area. There is always a risk that the Group’s employees will be targeted by competitors or technology companies. The loss of key employees of the Group may also have an adverse effect on the value of the Group. The Group mitigates this risk by performing a thorough review to market of the remuneration of its staff, balancing salary with longer-term incentive plans. A substantial number of staff are shareholders and hold options which may be exercised in normal circumstances if the market price exceeds 401.5 pence, being the listing price at the time of the Company’s IPO, 365 pence plus 10%, described more fully in the Directors’ Remuneration Report.

The Board has introduced a further long term incentive arrangement, known as the Carried Interest Plan, to ensure retention in the long-term, that is described more fully in the Directors’ Remuneration Report. This plan is the long term incentive arrangement which, at the Group’s IPO in 2006 and at the subsequent fund-raising during 2007, the Group announced plans to implement.

The value of the Group’s technology businesses portfolio and income receivable through realisations may be dominated by a single or limited number of technology businesses, companies or licensing agreements.

A large proportion of the overall value of the portfolio of technology companies held by the Group may at any time be accounted for by one, or very few, technology companies. As at 31 July 2009, the Group’s investment in AIM listed Ceres Power accounted for approximately 9.5% of the overall value of the Group’s technology company portfolio.

Accordingly, there is a risk that one or more such technology businesses experience financial difficulties, become insolvent or suffer from poor stock market conditions and, if as a result its value were to be adversely affected, this would have a material detrimental effect on the overall value of the Group’s technology business portfolio and the value of the Group itself. As equity realisations from the Group’ technology businesses are expected to be achieved through liquidity events, including trade sales and initial public offerings, the total income receivable by the Group from these sources may vary substantially from year to year.

In addition, a large proportion of the overall revenue from IP agreements granted by the Group may at any time be accounted for by one, or very few, licence agreements. Should such a licence or licence agreements be terminated or expire this may have a material detrimental effect on the revenue received by the Group. In addition, payments under such IP agreements are often subject to milestones which may not be achieved, meaning the total income receivable by the Group from these sources may also vary substantially from year to year.

The Group mitigates this risk by carefully monitoring its assets on a regular basis, careful portfolio management and by employing appropriately qualified experienced staff. However, it is the Group expectation that there will always be companies that dominate in this way.

Lack of control of technology businesses where the Group has a minority interest

The size of the Group’s shareholding in technology businesses will vary between them. The Group will not be able to exercise control over any affairs of technology businesses in which it has only a minority interest. Many technology businesses have, or are entitled to, put into place employee share plans which may dilute the Group’s interest.

The Group is seeking to mitigate this risk by increasing its investment activity and, together with our more active incubation programme, we should be able to exert much more control. We always recognise that forming new businesses is a partnership with the founding inventors and management and early decisions taken require all parties to agree their roles and the vision for the business.

Taxation – loss of substantial shareholding exemption

While Imperial College London continues to own over 50% of the issued Ordinary Shares, the Group should benefit from the substantial shareholding exemption from corporation tax on chargeable gains. This means that any gains that the Group realises from disposals of 10% or greater shareholdings in trading technology businesses should be exempt from corporation tax provided that the shares have been held by the Group for at least twelve months prior to disposal. Should Imperial College London’s holding fall below 50%, so that the Group ceases to be part of the Imperial College group of companies, transitional rules should apply which are likely to preserve this exemption for a further two years; thereafter, it is likely that the Group will no longer be exempt from corporation tax on chargeable gains arising on the disposal of substantial shareholdings on this basis.

Imperial College London has in the past sought to give comfort as to this risk by entering into a share sale lock up agreement wherein it has agreed not to sell down below 50%. That agreement has now expired following the three year period after the Group’s IPO on 31 July 2006. The Group is reviewing its tax planning opportunities to mitigate its position.