As Chairman, it is my responsibility to ensure that the board is performing its role effectively and has the capacity, skills, experience, personal qualities and support to enable it to continue to do so. We continue to develop the governance and control framework although no specific enhancements were required over the last year.
We will continue to review and improve our governance arrangements as appropriate. We believe that a sound and well understood governance structure is essential to maintain the integrity of the group in all its actions, to enhance performance and to impact positively on all our stakeholders - shareholders, employees, regulators, customers, suppliers and partners.
Orchard has adopted the QCA Corporate Governance Code (“the Code”) as a benchmark for measuring our adherence to good governance principles. These principles provide us with a clear framework for assessing our performance as a board and as a company, and the report below shows how we apply the Code’s ten guiding principles in practice.
Principle 1: Establish a strategy and business model which promote long-term value for shareholders
The board has adopted a clear strategy and business model which it intends will promote long-term value for shareholders and security for its other stakeholders (employees, regulators, customers, suppliers and partners).
Our strategy is set out in the Summary of Strategy and on page four of our 2022 annual report. In short, Orchard uses a combination of debt and its own capital, to lend to its customers. Stakeholder assets are given a high level of protection by a strict underwriting procedure, by recourse which provides a high level of insulation against losses and a robust loan sanctioning process. See the section Business Model on the website and beginning on page four of our 2022 annual report for more detail.
The interaction between the board and Executive team is essential for setting strategy. The annual budget is approved by the board and any potential changes in strategic direction are developed by the executive directors and brought to the board for discussion and approval.
Principle 2: Seek to understand and meet shareholder needs and expectations
The CEO and/or CFO are always available to key shareholders to explain what is happening with the group, at the same time getting valuable opinions on how they view our plans. In addition, details of our financial reports and AGM details are sent to all shareholders and these, together with results of votes and details of corporate governance committees are included on the website under the section Board Sub-committees. Employees are made aware of the group’s plans and achievements directly from internal briefings, typically from the CEO.
The board is kept informed of the views of shareholders and other stakeholders by regular updates from the CEO and CFO, together with formal responses on shareholder’s views gathered and supplied by the company’s advisers. The views of private and smaller shareholders, typically arising from the AGM or from direct contact with the company, are also communicated to the board on a regular basis. Shareholder inquiries should be directed to the CEO, Ravi Takhar, on 01582 346248 or by e-mail to Ravi@Bexhilluk.com. We have had no questions from the investors during this year.
Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success
The board is mindful of the fact that the long term success of the group relies upon maintaining successful relationships with a range of different stakeholders, both internal and external. We identify our key stakeholders to be our employees, shareholders, our introducing partners, other customers, creditors, regulators, other parts of government and the local and wider community, particularly that in which we operate.
We value our employees and we encourage staff to discuss, with the company, any issues or problems in addition to any ideas or views that they may have. During the pandemic staff worked from home to deliver a very high level of service to our customers. This proved so popular with our employees, and we had no reported instances of lack of service, that we have continued with this mode of working. Again, this year no member of staff raised any questions or had any issues that they wished to discuss. The group seeks to be a socially responsible entity – where possible, we employ from the local area and therefore contribute positively to the local economy and community.
We review the background of our main suppliers to ensure we work with organisations which share our values and high standards regarding human rights and other ethical considerations. We believe that our ethical business values provide an essential ingredient into our plans for future growth. While we always look for value for money from our suppliers, we never attempt to use our buying power to impose unfairly low prices. Suppliers who are happy to deal with us makes for continuity of supply and a mutuality of interests. We remain in regular contact with our suppliers as necessary (e.g. regular suppliers will be contacted more frequently than those which are dealt with, say, on an annual basis). Supplier issues will initially be dealt with by the staff member receiving details of the issue with a view to resolving the matter. If this is not possible it is immediately escalated to a director of the relevant subsidiary. If it cannot be dealt with at that level it is passed to the CEO. In all cases we try to resolve any problems with suppliers fairly and amicably for both parties.
In addition to the rules which come from being a limited liability company, employer and being listed on AIM, our operating subsidiaries are also regulated by the Financial Conduct Authority (FCA). Our customers therefore have a high level of statutory and regulatory protection when dealing with us. The company is compliant with the high standards expected of it by the FCA and acts on any feedback from the FCA at board level. Regulation is always specifically itemised on the agenda at board meetings.
We are in regular contact with our business partners (these are the brokers and professional introducers that we deal with) (see the section on Business Model on the website and beginning on page four of the 2022 annual report) and we carry out a variety of checks on them, on an ongoing basis. This provides an extra layer of assurance regarding potential bad debts on loans we grant to their customers. Also, as part of our contact process, we obtain opinions from our partners as to where our systems can be improved, whether they are getting sufficient help and support from us and how we can do more for them. As a direct result of their responses, our IT systems have been further enhanced and our delivery processes streamlined.
Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organization
Effective risk management is a key factor in our business. In addition to the strict underwriting, monitoring and approval procedures mentioned earlier, we also have an evolving risk management framework to identify all risks facing our business. We track these through a risk register, enabling us to act quickly and decisively where any issues are raised. Embedding a culture of risk awareness and effective management starts with all staff undergoing an induction process during which they have explained to them the key risks of the business as well as other important risk areas (including credit, financial, conduct, regulatory non-compliance, strategic and operational risks and also rules for staff dealing in shares and the avoidance of conflicts of interest). They are trained to identify these risks and respond or escalate any that change or emerge. Their first course of action is to report this to the head of operations who is also a director of both operating subsidiaries.
Our starting point is to identify the key risks to the business, evaluate the impact on the group, decide on our risk appetite and look at how we can mitigate those risks. The key risks have been identified as credit risk, liquidity risk, interest rate risk, non-use risk and non-payment risk (in the case of the bond issue) systems risk and conduct risk. See the section on Principal Risks and Uncertainties.
Principle 5: Maintain the board as a well-functioning, balanced team led by the chairman
As Chairman of the group board, I have had a 40 year career in Financial Services and have extensive governance, risk management and compliance experience enabling me to make a positive contribution to Orchard’s governance and risk management framework. The composition of the board consists of two executive directors (CEO and CFO) and two independent non-executive directors (INEDs) ensuring there is a good level of challenge and support for the executive and senior management. All directors (and senior management appointments) must have the experience necessary to carry out their functions. A thorough nominations process undertakes the assessment, background checks, referencing and validation before appointment to the board. Directors are required to keep up to date with relevant regulation and legislation through appropriate training, background reading, industry briefing and networking interactions. Job descriptions outlining key and regulatory responsibilities exist for each board and senior management appointment.
Prior to each board meeting the directors receive a detailed pack which includes:
Board meeting Agenda
Minutes from the previous board meeting
Board pack which includes details on financial performance, progress against plans for each business line of the business, operational and service performance, strategy and project execution, technology development and risk and regulatory compliance metrics
Existing and new business review
Regulation & Compliance report
Papers as required for additional items requiring board attention (e.g. change in strategy, major projects or items of planned expenditure).
All directors are subject to election by shareholders at the first AGM immediately following their appointment for an initial three year term. Thereafter, they are subject to re-election at intervals of no more than three years. In the case of non-executive directors, the term is limited to a maximum of three terms.
Short biographies of the group’s directors and details of their roles are set out in the section Board of Directors.
The Board has the following sub-committees – Audit Committee, Nomination Committee and Remuneration Committee.
Details of the work of these committees and their terms of reference are shown in the section Board Sub-committees. Their terms of reference and effectiveness is subject to annual review.
Details of matters reserved for the board are shown under Matters reserved for the Board.
The roles of the Chairman and CEO are detailed under Description of Roles of Chairman and CEO.
Meetings and attendance
The following table summarises the number of board and other committee meetings held during the period covered by the 2021 annual report and subsequently to the date of this statement, and the attendance record of individual directors at those meetings. Attendance includes conference calls and e-mails. The nominations committee did not meet during the year as there was nothing to discuss
L McShane was unable to attend the May meeting when he was in hospital.
Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities
The board includes two Independent Non Executive Directors (INEDS). The INEDS have been elected because of their specific board level experience in banks in the UK. The company therefore now has a suitably experienced, qualified and competent board of INEDS with the capability to ensure the on-going safety and soundness of the business and the experience to provide challenge and encouragement to the executive directors of the company. All board directors are required to stay up to date with market and regulatory changes and an annual assessment will be undertaken of their skills and capabilities to ensure they remain appropriate as the business evolves.
In assessing the suitability of Directors, the Board takes account of the following considerations:
Business judgment – the ability to attend to sufficient relevant detail; to learn lessons from the past with an open mind; to bring to the company experience from outside the organization; to make reasoned decisions in the absence of information.
Commercial awareness – familiarity and confidence in dealing with financial and management information; an understanding of the company business model as it is currently and how this would impact the performance and risks of the business in the future.
Risk understanding – the ability to weigh up risks and help the Board to set its risk appetite and to make good business decisions. An understanding of horizon scanning to help understand the changing market, technological, operational, regulatory and legal environment in which the business operates. Familiarity with the evolution of a three lines of defence risk management model.
Regulatory familiarity – understanding the regulatory, statutory, listing and legal conditions applicable to the Company. The ability to contribute to the technical aspects required for Board decisions on credit, financial, strategic, operational and conduct risk management.
Leadership – the ability to help guide management and to test management thinking; to ensure that staff and other directors are aware of their individual responsibilities (including under the regulatory Senior Management and Certification Regime); setting positive example (both inside and outside the organization).
Promoting the success of the company – Section 172(1) of the Companies Act 2006 requires each director of a company to act in the way he or she considers, in good faith, would be most likely to promote the success of the company. In the decision making process each directors should make decisions taking account of the interests of the company's employees; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment;, the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company. All the above take account of the likely consequences of any decision in the long term.
How the directors have achieved this requirement is set out on pages 13 and 14 of the 2022 annual report.
There is currently no formal policy for diversity within the board. However, this will be addressed over time. There is gender diversity in the main operating subsidiaries currently, with a majority of female directors in these.
There is an expectation that all directors are aware of the general duties applicable to company directors. Once a year each director confirms to the board that he or she continues to have the requisite skills necessary for the performance of his or her duties. This was confirmed in December 2022.
The board is authorised in its terms of reference to seek such external advice as is considered appropriate or necessary in circumstances where such advice helps with progressing the board’s strategic objectives. The board routinely consults with its Nominated Adviser, External Auditor and other professional advisers on matters arising in the ordinary course of its business.
The CFO is also Company Secretary
The CFO is currently the Company Secretary. The Board feels that the current scale and limited complexity of the business means that this serves the needs of the business for the time being and that this is both efficient and economic.
Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement
As has been stated already, the group is currently relatively small in scale and the board of directors is calibrated with a balance of independent Non Executive directors and executive directors to ensure it can operate efficiently and commensurate with good governance practice.
There is no formal Board evaluation process. The overall effectiveness of the board will be measured by how the company has performed against targets and how it responds to and complies with regulation.
The board operates under a Conflicts of Interests Policy and a Conflicts of Interest register is maintained for each board director. At the start of each board or Committee meeting, members are asked to declare any conflicts which may exist with the matters being discussed. If any conflict is identified, the conflicted party would not participate in such discussions.
In addition, the overall effectiveness of the board will be measured by how the company has performed against targets and how it responds to and complies with regulation. There have been no problems to date in these areas.
The remuneration committee sets the remuneration and all other terms of employment of the executive directors. Remuneration levels are set by reference to individual performance, experience and market conditions with a view to providing a package which is appropriate for the responsibilities involved. It is the chairman’s intention to seek to align the interests of the executive directors with those of the shareholders. The remuneration committee met twice in the year on 6 December 2021 and 7 July 2022.
Principle 8: Promote a culture that is based on ethical values and behaviours
The board is ultimately responsible for the culture of the company – setting the tone from the top. To ensure an alignment of staff with company values, all staff go through an induction process during which they have explained to them our values, what is expected of them and how they need to conduct themselves. The process is informal and takes account of the level of staff and what is required of them. The group operates out of a single Luton office, so it is relatively easy to monitor behaviour consistent with our values. Should any member of staff have an issue with unethical practices which come to their attention, they can report this to the Head of Operations. To date there have been no such issues.
Our culture is an integral part of our strategy. We are in a regulated industry and ethical behaviour is of paramount importance. Operating in a principled manner enhances our reputation in the market and our partners know this.
Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the board
The board believes that current structures are sufficient for the size and complexity of Orchard. It will monitor the requirements of this code and evolving regulatory requirements on at least an annual basis and revise its governance framework as appropriate.
Principle 10: Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders
Details of how the company is governed can be found both on the company website and in the company’s Annual Reports and Accounts.
The committees which met during the year to July 2022 were the Audit Committee and the Remuneration Committee.
The Audit Committee met prior to the 2022 external audit to discuss and agree the audit plan submitted by the auditor. The auditor identified two key audit matters, the calculation and disclosure of expected credit losses and the presentation, classification and measurement of listed debt. The auditor also identified three areas of audit focus; compliance with FCA regulations, going concern assessment and management override of controls. The Audit Committee considered these matters and confirmed the approach set out in the audit plan. The Audit Committee also reviewed whether the auditor had provided significant non-audit services to the company. There were no such services provided during the year.
The Remuneration Committee met to agree a discretionary bonus scheme for the CEO that aligns incentive payments with business performance and long-term strategic objectives. Remuneration will continue to be assessed on a basis that is affordable for the business and is fair to the individual, with the right balance of fixed and variable pay assessed against stressed targets on a balanced scorecard. In the first year of the new CEO bonus scheme, the business had a good year financially, successfully tested new sources of long-term funding via a retail bond and launched a new bridging loan product. The committee agreed a bonus of £200,000 for the CEO (2021 - £50,000). The committee also provided oversight of senior management remuneration.
The company engages with its significant shareholders at least twice a year or as often as they request. There were no such requests during the year. The main contact with other shareholders is through our website and by means of the AGM. AGM notices and minutes are shown on the website, under Shareholder circulars. Shareholders are invited to the AGM to vote in person or by proxy.
23 December 2022