Following changes to AIM rules on 30 March 2018, AIM companies are required to apply a recognised corporate governance code by 28 September 2018.
The K3 board supports the principles of good governance. In fulfilling their responsibilities, the directors believe that they govern the company in the best interests of the shareholders, whilst having due regard to the interests of the stakeholders in the group including, in particular, customers, employees and suppliers.
K3 has previously sought to apply certain provisions of the UK Corporate Governance Code, in so far as the directors considered it appropriate having regard to the size and nature of the group.
As a result of the recent changes to AIM Rules, the directors have considered and re-assessed the most appropriate recognised corporate governance code having regard to the size and nature of the K3 group, and, with effect on and from 28 September 2018, have decided to seek to adhere to the Quoted Companies Alliance’s (QCA) Corporate Governance Code (“the Code”) for small and mid-size quoted companies (which was recently revised in April 2018 to meet the new requirements of the updated AIM Rule 26).
The QCA Code is constructed around the following ten broad principles (and a set of disclosures):
Establish a strategy and business model which promote long-term value for shareholders
Seek to understand and meet shareholder needs and expectations
Take into account wider stakeholder and social responsibilities and their implications for long-term success
Embed effective risk management, considering both opportunities and threats, throughout the organisation
Maintain the board as a well-functioning, balanced team led by the chair
Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
Promote a corporate culture that is based on ethical values and behaviours
Maintain governance structures and processes that are fit for purpose and support good decision-making by the board
Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders
K3 has reviewed and considered where and how we apply each of the principles of the Code, and we set out below an explanation of this, and the circumstances where we believe we depart from the principles of the Code. Our key area of departure from the Code is in relation to principle 7 (evaluating board performance based on clear and relevant objectives), where a clear process of board evaluation has not previously been operated by the company. This is an area we will be assessing for future improvements.
As Chairman of the board, I am responsible for implementing corporate governance at the K3 group, working with the other members of the board and the company secretary.
I am a passionate believer in robust corporate governance, and some recent changes at K3, both in respect of our corporate governance practices, shareholder engagement and our wider business hopefully indicate our commitment to this. Our corporate governance practices will not remain static, and we will be regularly reviewing practices to seek improvement, and to keep pace with our business change. Our disclosures will be subject to update on our web-site, and our annual report will continue to provide detailed governance updates.
Stuart Darling, Chairman
K3 Business Technology Group plc (K3)
1. Establish a strategy and business model which promote long-term value for shareholders
The Board of Directors of K3 is responsible for determining the main aims of the company and agreeing a strategy to achieve those aims. The Board is also responsible for monitoring progress against K3’s strategic and financial goals and for initiating any corrective measures.
We report on our strategy annually in our annual report, and also from time to time if any changes which are price sensitive require us to make public disclosures. Because we operate in a sector (IT) that evolves rapidly, the board of directors regularly assesses the group’s strategy and strategic objectives in light of the industry landscape, and with the aim of promoting long-term value for shareholders.
We reported on our general market positioning in our most recent annual report (for the period to 30 November 2017) and we remain a leading provider of mission-critical Enterprise Resource Planning (“ERP”) and other business solutions to customers across the supply chain, including retailers, manufacturers and distributors. We support c.3,700 customers predominantly based in the UK, but also in Europe, the Far East and the USA. We deploy our business solutions, which are mainly built on Microsoft, Sage and SYSPRO solutions, both directly to customers and through channel partners. Once installed, our solutions generate high levels of recurring revenues through annual software maintenance renewals, support contracts and hosting.
Strategic Refocusing and Organisational Changes
K3 has recently undergone significant change. We have reshaped the group including the leadership team, creating a simpler, more integrated and streamlined structure, and have removed substantial costs. We have also redefined our growth strategy, IP development roadmap, and are improving our customer delivery capability. In addition, in July 2017 we completed a share placing and open offer to qualifying shareholders. While these initiatives have involved substantial one-off costs, as well as internal cultural change, we are encouraged by the progress made to date and the opportunities ahead.
We see scope for further operational improvements but believe that K3 is now substantially better positioned for long-term revenue growth, higher quality earnings and improved cash generation.
A core element of our growth and long-term strategy is to increase revenues from own intellectual property (“IP”). Our IP is embedded within specific third party ERP solutions, including Microsoft and SYSPRO’s, to provide sector specific functionality. It differentiates our solutions, underpins stronger customer relationships, and generates higher margins and recurring revenues. While we will continue to build on this model, an important part of extending our software roadmap is the growth of our own stand-alone ‘point’ solutions, and in particular, our cloud-native delivery platform, ‘ K3 Imagine’, and our cloud-native applications, which have been specifically developed to perform in the cloud.
As we previously reported, ‘K3 Imagine’ is an exciting ‘next generation’ delivery platform, which enables us to embrace fully the opportunities that the increasing shift to the cloud brings, and places us at the forefront of cloud-native development. What is especially relevant is that it is system agnostic, capable of swift integration with any IT infrastructure a customer may already have. Customers therefore do not need to replace core systems, unlike traditional models. We have developed a cloud-native suite of solutions that is built for our platform and provides highly advanced functionality. The whole offering therefore enables customers to adopt innovative solutions and applications rapidly and flexibly. It also offers them a faster return-on-investment and extends the life of their previous IT investments. We intend to develop additional applications for K3 Imagine in order to broaden the scope and target market of our existing solutions set, and view its growth potential very positively.
We regard this initiative, as part of our strategy of increasing revenues from own IP, of as one of our key steps in promoting long-term value for shareholders.
The board believes that K3 has the potential to build on its current position as a leading supplier of SME and mid-tier business system solutions, with a particular emphasis on our own Intellectual Property of ERP add-ons and point solutions. The board’s main objectives are to:
achieve growth in our own IP;
create shareholder value through increases in adjusted earnings per share;
grow recurring income levels; and
achieve progressive increases in the dividend.
2. Seek to understand and meet shareholder needs and expectations
10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders
K3 seeks to maintain good communication with shareholders. The CEO and CFO together with members of the Senior Management Team make presentations to institutional shareholders covering the interim and full year results. Whilst most shareholder contact (and responsibility for investor relations) is with CEO and CFO, the Chairman and the non-executive directors are available to meet major shareholders if requested to do so. The views of major shareholders are obtained through direct face-to-face contact and analysts’ or brokers’ briefings.
The board considers the AGM to be an important opportunity to communicate with shareholders and encourages their participation. The company despatches the notice of AGM, with explanatory notes describing items of special business, at least 21 working days before the meeting. All shareholders have the opportunity, formally or informally, to put questions to the company’s AGMs. All directors attend the AGM and the Chairmen of the Audit, Remuneration and Nominations Committees are available to answer questions from shareholders.
In June 2018, K3 held its first capital markets day for shareholders and potential investors. The event was planned to enable the K3 management team to further explain the strategy and activities of the K3 Group, with contributions from key stakeholders in the business, including customer representatives. The event was also designed to enhance investor engagement with management. Investor feedback was sought by the company’s nomad, and reported to the board. This format of event is likely to be repeated in future.
These include notices of as well as results of AGM, together with prior years’ annual reports. Whilst the Chairman announces detailed proxy voting results during each AGM for resolutions passed on a show of hands, these detailed results are not separately published by RNS. The Company intends to publish on its web-site these detailed proxy results in respect of future AGMs.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success
K3 recognises the importance of its relationships with key stakeholders. As well as shareholders, other key relationships include employees, customers and suppliers (including our software partners and bankers).
Monitoring and enhancing the strength of those stakeholder relationships is part of K3‘s day-to-day goals and constitutes a critical focus for the group.
Employees: K3 recognises the importance of a talented and motived workforce, and has recently sought to increase engagement with its workforce with encouraging results, including:
a “temperature check” with all employees in February 2018, involving a short anonymous questionnaire enabling K3 to gauge employee engagement and seek suggestions for improvement;
In May 2018, the first groupwide K3 employee virtual conference was held, where employees were given the opportunity to learn more about (and provide feedback on) activities across the group;
A regular all-employee newsletter has been commenced, together with the release of a regular CEO ‘inform’, where the K3 CEO provides a video update with recent news and initiatives from across the group.
The success of these steps has meant that they are likely to be repeated in future, to continue to maintain and enhance positive relations within the workforce and to obtain feedback.
Customers: Customer satisfaction is of critical importance to K3, and is one of the principal focuses of the business. The majority of customers have a designated K3 account manager, to manage the relationship, and to whom feedback can be directed. The feedback can then be acted upon and/or escalated as and when necessary by the account manager.
Many customer projects also have executive sponsors within the group, where senior managers are appointed to oversee and ensure appropriate dialogue in relation to key customer projects. This ensures there is sufficient customer engagement at the correct level within the K3 group.
Customer days and seminars are also used within the K3 group to encourage positive relations and elicit feedback to drive improvements for long-term success.
Suppliers: As a reseller of software, including Microsoft, Sage and Syspro, K3’s relationships with software partners are important to the success of the business, and are an area of continued focus for the group. Many of these relationships are long-term.
Regular engagement is also sought and encouraged with our bankers, through regular meetings with our CFO and other members of the finance team.
4. Embed effective risk management, considering both opportunities and threats, throughout the organisation
The board recognises its ultimate ongoing accountability for maintaining an effective system of internal control which is appropriate in relation to both the scope and nature of the group’s activities. The system covers all controls including:
The responsibility for managing risks on a day to day basis lies with the CEO and Senior Management Team. Risk mitigation is also supported by the work of the K3 audit committee, and the transparency of our internal K3 whistleblowing policy. K3 also maintains insurances against normal business risk, and takes advice from our broker accordingly.
The principle business risks and the actions to mitigate those risks were reported on pages 19 and 20 of the most recent annual report. Details of operational risks were also reported on pages 24 and 25 of that report.
Whilst the board recognises that risk cannot be entirely eliminated, it believes there are sufficient controls in place to seek to mitigate potential impact.
5. Maintain the board as a well-functioning, balanced team led by the chair
6. Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
The K3 board is made up of two executive directors and four non-executive directors. The roles of the Chairman and Chief Executive are distinct. The board does not presently include a senior independent director. The company has a separate company secretary, who is also the group general counsel.
Biographical details of the current board are available as follows:
The board meets no fewer than 6 times a year, with such additional meetings called as and when necessary. Board meetings are expected to be attended by all directors and the company secretary. Board meeting attendance is recorded, and reported in the annual report.
The board is supplied in a timely manner with information of a quality to enable it to discharge its duties, which includes a regular monthly board back including updates from the executive management team, detailed financial information relating to the financial period to date, including measurement against pre-defined KPI’s.
The board has determined those matters which are retained for board sanction and those matters which are delegated to the executive management of the business. Day to day management of the business is dealt with by the CEO who has a Senior Management Team reporting to him which includes senior management from each of the divisions together with the CFO. The types of decisions which are to be taken by the board are:
approval of the financial statements and financial budgets and plans for the group;
approval of all shareholders’ circulars and key announcements;
the purchase or sale of any business or subsidiary;
any new borrowings, facilities and related guarantees;
any asset purchase or lease, hire purchase facility or rental agreement over prescribed authority limits.
The board has established four standing sub-committees to assist in the discharge of corporate governance responsibilities. They are the nominations committee, remuneration committee, product committee and audit committee. The roles of the nominations committee, remuneration committee and audit committee and their activities are available at http://www.k3btg.com/investor-centre/corporate-governance/
Presently the four non-executive directors are the members of each committee.
The composition of the board is designed to provide an appropriate balance of group, industry and general commercial experience and is reviewed as required to ensure that it remains appropriate to the nature of the group’s activities.
Appointments to the board are the responsibility of the nominations committee. All non-executive directors have written terms of appointment, and are paid a fixed fee for their office which is not performance or incentive based.
The Company has three independent non-executive directors (Paul Morland, Stuart Darling and Jonathan Manley), as recommended by the QCA Code. Jonathan Manley has provided consultancy services for the company for which he is paid a fee, in addition to his role as non-executive director, but this is not regarded as compromising his independence.
Johan Claesson (non-executive director) is a significant shareholders and has been on the board for over 9 years, and would therefore more likely not be regarded as independent in accordance with the Code..
Notwithstanding this, the board believes that the interests of each non-executive director are aligned with those of shareholders and that the board composition is appropriate for the circumstances of the Company.
The Articles of Association of the Company require that no fewer than one-third of directors should be subject to re-election at each AGM. Any director serving over 9 years since first appointment is also subject to re-election at each AGM in accordance with the company’s articles.
7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
Board and board committee membership was evaluated in 2017, which led to changes to the composition of the board and its committees and the appointment of a new Chairman.
Board performance is presently reviewed regularly but informally, and there is no specific formal evaluation process (whether internal or externally facilitated) as recommended by the QCA Code.
The board intends to review both performance measurement and succession planning in light of the recommendations of the Code during the 2018/2019 financial year, with a view to assessing the implementation of a more formal process.
8. Promote a corporate culture that is based on ethical values and behaviours
The K3 group seeks to carry out its business with the highest standards of integrity, and on the basis of sound ethical values, and its corporate culture seeks to reflect this premise.
The board maintains oversight of this through receipt of regular management reporting, which would, where appropriate, include any material issues relating to corporate culture and integrity and ethics, including any updates to or non-compliance with key internal ethics policies.
The K3 group maintains written policies and procedures concerning a number of areas that impact on its ethical values, and these policies, which are shared with all of the group’s staff, underpin some of the ethical elements of our culture. These include detailed policies addressing health and safety, anti-bribery and corruption, whistleblowing, equal opportunities and anti-harassment.
K3 is currently undergoing a programme to create a more unified organisation, which is expected to drive benefits for customers, partners and employees. As part of this programme, the board expects the group’s relationships with and support of employees and customers in particular to be at the forefront of the groups’ core values and culture, and driven by its ethical approach to business.
9. aintain governance structures and processes that are fit for purpose and support good decision-making by the board
The K3 board as a whole has responsibility for promoting the success of the company and for the strategic leadership of the group, with day-to-day management of the business of the group the responsibility of the executive directors and senior management team.
The Chairman of the board is responsible for running the board, and has overall responsibility for corporate governance, but with the support of the other directors and the company secretary. The Chairman of the board is also chair of the audit committee.
Shareholder relations are primarily managed by the CEO and CFO.
Audit Committee. The audit committee is responsible for overseeing the group’s internal financial controls and risk management and to consider the appointment of the auditors, audit fees, scope of audit work and any resultant findings. It reviews external audit activities, monitors compliance with statutory requirements for financial reporting and reviews the interim and full year financial statements before they are presented to the board for approval.
Nominations Committee. The nominations committee is responsible for nominating candidates (both executive and non-executive) for the approval of the board to fill vacancies or appoint additional persons to the board. The nominations committee is also expected to review at regular intervals the structure, size and composition (including the skills, knowledge and experience) required of the board compared to its current composition and make recommendations to the board with regard to any changes.
Remuneration Committee. The remuneration committee reviews the remuneration and contractual arrangements of the executive directors, and determines and agrees with the board the framework or broad policy for the remuneration of the company’s CEO and executive directors. The remuneration of the Chairman and the non-executive directors is determined by the board as a whole, based on a review of the current practices in other companies.
Additional information concerning matters reserved for the board, and the functions of the above roles are also set out at section 3 above.
Following adoption of the QCA Code in 2018 as the company’s governance framework, the board expects to continue its focus and assessment of its corporate governance practices, in particular during the 2018/2019 financial year, with the aim of making improvements where reasonably necessary or desirable.