Pursuant to the provisions of paragraph 6, article L.225-37, of the French Commercial Code the Chairman of the Board of Directors hereby reports on the:
terms and conditions governing the preparation and
organization of the Board’s work;
internal control procedures implemented by the
company;
limitations that the may have been imposed on the
powers of the Chief Executive Officer by the Board
of Directors.
This report has been produced on the basis of work
undertaken by the Finance and Corporate Affairs
Department, with the different operating departments
of the company and exchanges with the statutory
auditors in connection with internal audits conducted
at the company’s initiative.
Concerning the corporate governance code, in compliance
with the law of July 3, 2008 introducing various
measures to be adopted by companies governed by
Community law, this report also contains a presentation
of corporate governance procedures relating to the
AFEP/MEDEF code for listed companies of December
2008, to which the company has decided to voluntarily
refer. Provisions not applicable or that cannot be
implemented by the company are also specified in
this report.
This report was submitted for approval to the Board
of Directors on March 3, 2009.
1. Preparation and organization of the Board’s work
1.1 Composition and operation of the Board of Directors
Under the company’s bylaws, the Board of Directors
may have three to eighteen members.
At December 31, 2008, corporate governance of
the company was overseen by a Board that included
10 directors three of which qualified as independent
directors. Detailed information on the composition
of the Board of Directors is disclosed in the registration
document (annual report) in the section on directors
and officers.
Directors are appointed for six-year terms whereas
the AFEP/MEDEF guidelines recommend maximum
terms of four years. However, the Board considers
that this point does not constitute an obstacle to
good corporate governance practices by the company
provided that the Board ensures at the time of the renewal and/or appointment of new directors a
balanced composition of the board contributing to its
effectiveness and preserving the quality of proceedings.
The Board may meet as often as the interests of the
company requires and at least five times a year at the
request of the Chairman and according to a calendar
jointly established in the second half of the preceding
year. This calendar may be modified at the request
of directors or when justified by unforeseen events.
The Chairman represents the Board of Directors.
He organizes the work of the Board and reports on
this work to the general meeting. The work of the Board
is carried out in a collegial framework and in a manner
consistent with the principles of ethical conduct in
compliance with laws, regulations and recommendations.
Accordingly, the Chairman of the Board of Directors
ensures directors are provided with information in
advance and on a regular basis, that constitutes an
essential condition for the performance of their duties.
The Board has not deemed it necessary to date to form
special committees in part because of the nature
of the organization of the company and its business
model, and in part because of the extensive in-depth
experience directors have in respect to the world of
business and the international markets of competitors.
This type of organization contributes to flexible decisionmaking
processes.
In compliance with the new provisions of L.823-20
of the French Commercial Code, the Board of Directors
decided on March 3, 2009 not to create an independent
audit committee but rather to exercise the functions
of audit committee in plenary session on condition
that this includes participation of independent directors.
Today, there exist no formal procedure for evaluating
the Board’s operations and work. However an informal
practice has been adopted based on internal discussions
of the quality of the composition of the Board of
Directors, directors’ compensation, the frequency
of meetings and the transmission of information
to Board members. The discussions have highlighted
a favorable assessment concerning the Board of Directors’
operating procedures and the need to maintain the
frequency of meetings devoted to discussions on strategic
issues. To ensure the optimal performance of the
Board in a manner that complies with the principles
of good corporate governance, the Board is considering,
in respect to the AFEP/MEDEF recommendations
of December 2008, to undertake an initial evaluation
on implementing a method for evaluating the operations
of the Board and the quality of its work.
1.2 Powers and missions of the Board of Directors
In line with the option adopted by the Board of Directors
on December 29, 2002, in light of the company’s
structure and the active participation of the founder
in its development, the Board decided not to separate
the functions of Chairman of the Board of Directors
with that of Chief Executive Officer (Directeur Général).
In consequence Philippe Benacin, who exercises
the functions of Chairman of the Board of Directors,
also serves as the Chief Executive Officer of the company.As such he is vested with all powers in respect to
third parties to act under all circumstances in the
name of the company and within the limitations
expressly provided by law granted to Board of Directors
or shareholders meetings, and in compliance with
the general and strategic orientations defined by the
Board of Directors. Decisions having a material
impact on the scope of consolidation or that could
materially affect the company’s strategy must be
submitted to the Board of Directors for approval.
This limitation is stipulated in the Board Charter.
In compliance with article 15 of the bylaws, the Board
of Directors determines the strategic objectives of the
company and ensures their implementation, within
the scope of the corporate charter and subject to
those powers expressly granted by law to shareholders’
meetings. It performs all controls and verifications
it considers appropriate. Each director receives all
information necessary to the performance of his or
her duties and may request any documents considered
necessary.
In the period ended December 31, 2008, the Board
of Directors met eight times. The average rate of
attendance of directors was 69%. In general, meetings
were held at the company’s headquarters in Paris.
In the period under review, the Board of Directors
addressed the following items of business:
review of the parent company statutory and
consolidated financial statements for the fiscal year
ended December 31, 2007 and the interim financial
statements;
review of the fiscal year 2008 budget and outlook
authorizations concerning agreements in accordance
with L.225-38 et seq. of the French Commercial Code;
analysis of financial information disclosed by the
company to shareholders and the market;
analysis of the major strategic, economic and financial
priorities of the company;
review of external growth projects;
adoption of the AFEP/MEDEF recommendations
of October 2008.
Auditors attend all Board of Directors’ meetings held
to consider the company’s accounts or any other matters
regarding which they may provide Board members
an informed opinion. Their participation in meetings
is requested by letter or any other means provided
for under the bylaws.
1.3 Charter of the Board of Directors
On March 3, 2009, the Board of Directors adopted
a Board Charter defining the operating rules for
the Board and the organization of its work to which
it is subject by virtue of provisions of the law and the
company’s bylaws. The main provisions of this charter
are as follows:
the composition, role, organization and operating
procedures of the Board;
the functions of audit committee exercised by the
Board of Directors;
the rules of conduct applicable to Board of Directors;
compensation of directors;
rules governing transactions involving the company’s
shares in accordance with the provisions of the French
Monetary and Financial code and the AMF General
Regulation.
This Charter is destined to regularly evolve as new
regulations and recommendations are introduced
and in response to proposals by directors to ensure
the optimal effectiveness of the Board’s work.
1.4 Transmission of information to directors
In accordance with the provisions of the bylaws,
directors are provided with all relevant documents
and information to effectively perform their duties.
Before each Board meeting, directors receive:
a meeting agenda established by the Chairman
in coordination with general management and, when
applicable, directors proposing items to be discussed;
an information file concerning issues to be addressed
under the agenda requiring particular analysis for
the purpose of an informed discussion, during which
directors may ask relevant questions to ensure their
adequate understanding of the matters addressed;
and, when useful, press releases that have been
published by the company as well as significant press
articles and reports of financial analysts.
In addition to information provided in connection
with Board meetings, directors are regularly provided
with all significant information concerning the company.
They may request any explanation or the issuance
of additional information, and in general, formulate
any requests for access to information they may
consider useful.
1.5 Directors’ fees
Directors’ fees are allocated exclusively to outside
officers of the Board of Directors. The total amount
granted by the general meeting is freely allocated
by the Board of Directors.
The Board has decided to allocate this total amount
to each director on the basis of their record of attendance
at Board meetings.
1.6 Participation in shareholders meetings
Under the terms of article 19 of the company’s
bylaws all shareholders have a right to participate
in general meetings, personally or through a proxy,
regardless of the number of shares they hold, upon
simple justification of their identity and ownership
of the shares.
1.7 Disclosure of information provided for under
article L.225-100-3 of the French Commercial Code
To the best of the company’s knowledge there exist
no items, and notably those relating to the structure
of the share capital that could have a potential impact
in the event of a public offering. The structure of the
share capital as well as the equity interest that have been
brought to the company’s attention and any other
information relating thereto are described in chapters
3 and 8 of the section on shareholder information of
this registration document. Similarly, rules concerning
the appointment and revocation of members of the Board
of Directors are subject to the rules of common law.
2. Internal control
2.1 Internal control procedures
Definition
The company’s internal control procedures have
in large part been based on the guidelines established
by article 404 of the Sarbanes Oxley Act that applies
to the parent company because it is listed on a New York
Stock Exchange. The principles determined therein
are in part provided for under the AMF guidelines
of January 2007 completed by the guidelines for small
and mid caps of January 9, 2008.
In consequence, in compliance with the both SOX
and AMF guidelines, internal control constitutes a set
of procedures defined and implemented by the company
under its responsibility to ensure:
compliance with laws and regulations;
the application of instructions and priorities set
by general management;
the effective application of internal processes notably
concerning the protection of corporate assets;
the reliability of financial information.
This system covers all practices, procedures and actions
adapted to the specific references of the company which:
contribute to the effective management of its activities
and operations and the efficient use of resources, and;
enable it to properly take into account de material
financial, operational or compliance risk.
In consequence, the company’s system of internal
control complies with the guidelines recommended
both by the Sarbanes Oxley Act and the AMF.
These cover the organization and principle of control,
risk assessment processes, activities of control,
formalization of control procedures, oversight of
the internal control system.
The primary objective of internal control is to manage
and prevent risks resulting from the activity of the
company and risks of material errors or fraud,
particularly in accounting and financial areas.
However, no system of internal control can provide
an absolute guarantee of achieving these objectives.
The probability of achieving such objectives is subject
to limits inherent in any system of internal control,
related notably to uncertainties concerning the external
environment, the exercise of judgment or problems
that may arise in response to human error or simple
error, and the need to perform cost-benefit analysis
before implementing any controls.
Components of the internal control system
The effectiveness of the procedures is based on the
following key factors:
the responsibility of participants in preparing,
implementing and ensuring the optimal management
of internal control procedures;
establishing formalized procedures and compliance
with guidelines within the company;
separation of line management functions from
control functions.
The internal control organization and environment
To ensure the optimal management of the image of
its brands and the maximum degree of transparency
vis-à-vis customers in respect to its organization and
to increase its performance, the company is organized
around two major business divisions, one dedicated
exclusively to the Burberry brand, the Burberry
Fragrance Division, and the other to brands referred
collectively as the Luxe & Fashion Division, whose
operations are supported by the resources and expertise
of the different functional and operating departments
of the company. This organization is based on five
operating and functional departments:
Production & Logistics;
Burberry Fragrances, Marketing & Export Sales;
Luxe & Fashion, Marketing & Export Sales;
French Sale ;
Finance and Corporate Affairs.
Each of these departments contributes at its own
level of responsibility to achieving the objectives set
by general management.
This organization has demonstrated its flexibility,
strength and effectiveness based on achieving real
synergies with the operating and functional departments.
It is also based on an objective to promote the convergence
of the resources of the different divisions involved
and the principle of a decentralized organization
combining the advantages of flexibility and the delegation
of responsibilities necessary for ensuring the optimal
and coherent application of the strategic objectives
set by general management.
The internal control policy defined is adapted to this
organizational model. The general architecture of the
system is based on a clear separation of roles between
persons exercising operational functions and those
that validate and control these functions.
On this basis, the system of internal control is organized
around the following operating and functional activities,
considered to have an impact on assets and/or results:
key operating processes in the management of
production, sales to distributors and the management
of the company image;
processes and managing resources, and notably cash
and currency hedges, human resources, committed fixed
costs and overhead, monitoring capital expenditures
and tax obligations, monitoring the settlement of
trade receivables;
the processing and communication of accounting
and financial information.
Risk management responsibilities are exercised at
every level of the company. For each department
concerned, the company has defined the missions,
organization, contribution to critical decisions, criteria
for measuring their performance and their relations
with other departments. To this purpose, they must
possess the knowledge and information necessary
to establish, operate and oversee the internal control
procedures in relation to the objectives that have been
set for them. An in-depth analysis of the separation
of operational and control functions was undertaken
to address the objectives of control.
The efficiency of the organization is furthermore based
on a human resources policy that ensures profiles
effectively match the corresponding responsibilities,
while integrating the key values behind the company’s
success: prudence, pragmatism, responsiveness, high
standards, transparency and loyalty. Contributing
to the expertise and know-how of a team of men and
women sharing a common culture of commitment to
integrity and high standards that distinguish the company
thus constitutes an important part of internal control.
Finally, awareness and understanding of the importance
of internal control are enhanced by the formalizing
a number of internal procedures considered essential
for effective operations of the company in a secure
environment. To this purpose, a guide of internal
procedures has been produced detailing the main
operating and financial processes covering notably sales/
customers, sourcing/suppliers, inventory, IT systems
and personnel/payroll. This manual also provides
detailed information about procedures for expense
requests and bank accounts signature authorizations.
In addition, the company has developed an information
technology charter for all personnel to ensure that
information technology resources are operated in a security
environment for the company’s computer network.
Key participants in internal control procedures
Along with all staff that contribute to the process of internal control, the following parties in particular actively contribute to its oversight and implementation:
General Management
This includes the Chairman and Chief Executive
Officer, assisted by two Executive Vice Presidents.
They define the major strategic priorities to achieve
the commercial and financial objectives of the company.
This is done by providing clearly defined internal
procedures and an internal control system for which
they are directly responsible. They define the general
principles and ensure the implementation of the
different components of internal control.
The Board of Directors
In connection with information provided to the Board,
its members review all the main characteristics of the
internal control procedures and system. The Board
may exercise its authority to request verifications
and controls it considers appropriate to ensure the
transparency, effectiveness and security of the internal
control environment.
The Finance Department
The Finance Department exercises responsibility over
cash management, management control, consolidation
and accounting, legal affairs, human resources,
audit and internal control, financial communications
and investor relations, as well as IT activities. The
responsibilities are exercised and/or delegated in such
a manner that each of the areas concerned assure
the consistency of financial and accounting data in
connection with the following tasks:
preparing and monitoring accounting and financial
information;
producing statutory and consolidated interim and
annual financial statements of the Group in compliance
with market standards and applicable regulations;
the budget process and forecasts and the implementation
of monthly management reporting procedures and
analysis of variances between actual results and budget;
producing financial communications information;
implementing and monitoring accounting and
management procedures and guidelines;
overseeing accounting and management information
systems;
management of uncollected trade receivables;
control of disbursements and use of bank
authorizations.
The Finance Department also supports operating
departments and management by establishing operating
procedures, defining and promoting the use of tools,
procedures and good practices essential for application
by the latter of the objectives defined by General
Management.
Identifying, evaluating, managing
and managing monitoring risks
The sustainable development of the company’s business
and the achievement of its objectives depends on an effective
understanding of the risks. For this reason, the company
has launched a process of mapping general risks, establishing
a hierarchy of the main risks to which it considers it is
exposed, according to their seriousness, probability, frequency
and degree of control. These risks are presented in chapter 3
of the management report. This process highlighted
measures to be implemented to limit the likelihood of the
occurrence of such risks as well as their consequences.
Since 2004, the company has applied a risk mapping
approach, followed by the implementation of a selfassessment
of internal procedures to strengthen the
understanding and the adoption of internal control
processes in force. This regular review of risks makes
it possible to measure progress in implementing
programmed actions, changes since the previous
assessment of risks and take into account new risks
that may be identified through this process.
This process of self-evaluation is undertaken annually
with the assistance of a well-known outside independent
audit firm. This involves identifying key assets of the
company, analyzing potential risks, existing or emerging,
by type of task assigned to each department concerned
and meetings with the operating departments concerned.
The audit consists of conducting a general overview
of the organization of internal control to obtain
a description of the internal control system by sending
managers a sample of tasks selected according to the
degree of risk they generate for the company when
they have an impact on the company’s financial
statements. The company produces a self-assessment
questionnaire to measure the application of internal
controls on the basis of voluntary statements. If processes
and the associated controls are not formalized or are
considered insufficient a remediation plan is implemented
by the manager concerned to complete the existing
system of internal controls.
Implementation of this audit plan is carried out under
the responsibility of the Finance Department and covers
the following key processes:
purchasing/management of trade payables: this process
is formalized by procedures based, on the one hand,
on the separation of the functions for placing orders
and for authorizing orders, acceptance, the recording
of the transactions in the accounts and payment of
suppliers, and on the other hand a process of monitoring
and reconciling purchase orders, receiving slips invoices
(quantity, price, terms of payment) supplemented by
a procedure for preventing dual recognition/payment
of supplier invoices. Eventually anomalies are analyzed
and monitored;
sales/trade receivables management/collection: this
process ensures that all deliveries made and/or services
rendered are invoiced within the specified period and
invoices are properly recorded in the trade receivables
accounts. It also determines procedures for issuing
credits which must be justified and controlled before
being booked. This process in addition contributes
to properly identifying doubtful trade receivables
and anticipating risks of default;
payment of royalties to licensors: this process involves
detailed analysis of methods for processing information
for sales representing a component for the calculation
of these royalties in order to prevent errors that could
compromise the reliability of the financial information
of the company;
cash management: this evaluation makes it possible
to ensure that bank accounts are reconciled on a regular
basis with information received from the banks
and reviewed periodically in order to document the
reconciliations and explain eventual variances;
preparing financial and accounting information:
the review of the fair presentation and consistency
of account closing procedures to ensure a reliable
consolidation consistent with data collected and submitted
to the Finance Department;
information systems management: this process ensures
the development and maintenance of computer
applications and the network, the logical and physical
security of the information system, including a backup
plan to guarantee continuity and the resumption of
activity in the event of an incident.
On completion of this self-assessment process, the Finance
Department transmits the results of this work to the
different departments concerned and reports to General
Management to which it provides an executive summary
along with a detailed report indicating control issues
and highlighting eventual dysfunctions or potential
dysfunctions that could result from inadequate controls.
This report is accompanied by a plan of recommended
actions to correct the dysfunctions identified within
a reasonable timeframe.
The test of internal control procedures conducted in
2008 resulted in the performance of 72 controls focusing
on 65 areas of risk covering the following processes:
