As the newly appointed Chairman of Orchard, it is my responsibility to ensure that the board is performing its role effectively and has the capacity, ability, structure and support to enable it to continue to do so. As we contemplate a future banking license for the Group, this assumes a heightened importance and we have undertaken a full review of governance arrangements with this in mind.
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 our shareholders, staff, customers, suppliers and other stakeholders.
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 five of our 2019 annual report.and on page five of our 2019 annual report.
In short, Orchard borrows funds from its bankers and uses these together with its own reserves, to lend to its customers. Stakeholder assets are given a high level of protection by a strict underwriting procedure, recourse guarantees to insulate lending against losses and a robust loan sanctioning process. The group has applied for a banking license which will necessitate evolution in control, monitoring and risk management to protect money raised by the company from non-institutional lenders in the form of customer deposits. See the section Business Model on the website and on page five of our 2019 annual report for more detail.
- The interaction between the Board and Executive team is essential for setting strategy - any potential changes in strategic direction are developed by the executive directors and brought to the board for discussion and approval.
- A recent example of board involvement in strategy was the application for a bank license to the Prudential Regulatory Authority and the Financial Conduct Authority to obtain a bank license for Orchard. We chose this important strategic step to ensure: that the company would no longer be wholly reliant on 3rd party banks for its funding requirements; to reduce the company’s cost of funds; and to enable the company to increase its lending capacity in its target markets. The company anticipates receiving the bank license during 2020. In this instance, we identified a key funding concentration risk in the business and considered with the Board the best way to turn this into a positive opportunity for the future.
Principle 2: Seek to understand and meet shareholder needs and expectations
The CEO and/or CFO meet with key shareholders twice a year at roadshows and explain what is happening with the group, at the same time, getting valuable feedback 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. Staff 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 feedback 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.
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, regulators, customers, suppliers and partners. We also have a responsibility to the local community in which our business operates.
We value our staff and, in addition to good rates of pay and bonuses, we also provide health club membership and childcare provision for any staff who wish it. We encourage staff to discuss, with the Company, any issues or problems that they may have, in addition to any ideas or views that they may have; there are short and open communication lines, as the CEO and management team is regularly in the same room as the rest of the staff, it being an open office environment. There are also monthly staff meetings at which staff are, again, encouraged to provide their views or question management. These views are brought to the Board as part of our board meetings. This fosters a culture of engagement across all aspects of the business and innovation in what we do, contributing to a loyal and motivated workforce. 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 and 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. When the Company becomes an authorised banking institution, it will additionally become subject to regulation by the Prudential Regulation Authority which will focus on the safety and soundness of the Company as a Bank. Regulation is always specifically itemised on the agenda at board meetings. A recent example where the company has acted on feedback from the FCA is in relation to the appointments of Simon Dunkley as our Chief Risk Officer (CRO) and Ian Martin, who will be appointed Chief Financial Officer (CFO) upon approval of the banking application (both appointments remain subject to regulatory approval). These appointments strengthen the breadth and experience of the senior management team ahead of potentially becoming an authorised bank.
We are in regular contact with our business partners (these are the brokers and professional that we deal with) (see the section on Business Model) 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 feedback 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 (including credit, financial, conduct, 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. At the same time, the newly appointed CRO now provides a second line of defence to monitor these risk exposures and report on them to the Risk Committee and Board. The key risks have been identified as credit risk, financial risk, conduct risk, strategic risk and operational 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 bring considerable banking and Board level experience to the Board. In preparation for a potential bank authorisation, the composition of the Board has changed and now consists of two executive directors (CEO and CFO) and three independent non-executive directors (INEDs). My fellow INEDs bring substantial relevant experience and the various Board Committees (Risk, Audit, Nomination and Remuneration) operate under their Chairmanship and membership). 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. Board effectiveness reviews and Director evaluations, which have been largely informal to date, will in future become more structured and formal as the business progresses towards becoming an authorised bank.
Prior to each board meeting the directors receive a detailed board 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, and risk and regulatory compliance metrics
Existing and new business review
Regulation & Compliance
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 for a maximum of three terms. To anticipate future board director and senior management requirements, the Board will periodically (annually) review a succession plan prepared by executive management.
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, Risk Committee (newly created) and Nomination and Remuneration Committee. Membership of these Committees comprises INEDs only to preserve their independence, with Executive Management in attendance as necessary.
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 audit committee meetings held during the period covered by the 2019 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 remuneration committee and nomination committee did not meet
Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities
The new INEDs have been recruited on the basis of their broad business experience and their specific experience operating at Board level in banks in the UK. This is in preparation for the potential banking licence, which, if successful, requires the Company to have a suitably experienced, qualified and competent board of independent directors 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 impacts the performance and risks of the business as it transitions towards becoming a bank.
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 in its current form and as it transitions towards becoming a bank. 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).
There is currently no formal policy for diversity within the board. However, this will be addressed over time as the business transitions to becoming an authorised bank. The newly appointed INEDs were recruited for their specific experience to support the banking licence application of a business such as this. There is gender diversity in the two operating subsidiaries currently, with a majority of female directors in each.
Only Directors experienced in the financial services industry will be appointed as this is essential in support of the banking licence application. There is therefore the expectation that they are also aware of the general duties applicable to company directors.
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. An example of this would be assistance obtained in support of some of the technical aspects of the banking application submission.
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. This situation will be reviewed be the Board as the business transitions towards becoming a bank to ensure that this continues to be the case.
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 majority quorum of independent directors plus executive directors to ensure it can operate efficiently and commensurate with good governance practice.
Formal Board evaluation disciplines are being instituted as part of the transition towards becoming a bank. Previously the Board has undertaken a less formal approach to assessing its performance during the course of its meetings.
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.
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 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. 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 recognises that the transition to banking business will require the evolution of its current governance structures. However, it 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 only committee which met during the year to Dec 2019 was the Audit Committee.
The Audit Committee met prior to the 2019 external audit to discuss and agree the audit plan submitted by the auditors.
In summary, there were no key audit issues identified, but there were three areas of audit focus: non-compliance with FCA regulations, impairment of loan book and management override of controls. The Audit Committee considered these matters and confirmed that 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.
Details of the approach are shown on page 19 of the 2019 annual report.
The company engages with its significant shareholders by means of roadshows. 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.
14th May 2020