Board of Directors
The Sopheon Board is committed to maintaining high standards of corporate governance and, as required by AIM Rule 26, with effect from 28 September 2018, the Board has adopted the Quoted Companies Alliance’s (QCA) Corporate Governance Code for small and mid-size quoted companies (the “QCA Code”).
The QCA Code was revised in April 2018 to meet the new AIM requirements and sets out ten broad principles of corporate governance, states what are considered to be appropriate corporate governance arrangements for growing companies and requires companies to provide an explanation about how they are meeting the principles through certain prescribed disclosures.
Solid corporate governance is the foundation on which the business is managed and this is supported by the range of talents we have on the Board. Our biographies appear above, and demonstrate a range of experience and calibre to bring the right level of independent judgment to our business. Ensuring financial strength alongside growth objectives is a key guiding principle, supported by an effort to ensure solid communication with shareholders as further detailed in this report.
As the Chairman I lead the Board and I am responsible for its overall effectiveness in directing the Group, and for ensuring that the Board implements, maintains and communicates effective corporate governance processes and for promoting a culture of openness and debate designed to foster a positive governance culture throughout the Group.
The Board has considered how the QCA Code should be applied and we provide below an explanation of the approach taken and how this supports the Group’s medium to long-term success.
Adoption of QCA Code and Related Matters
Recent changes in AIM Rule 26 require all AIM quoted companies to give details of the corporate governance code that they have decided to apply, to explain how the Group complies with that code, and, if we depart from the QCA Code, to explain the reasons for doing so.
Of the recognized codes generally adhered to by AIM companies, the QCA Code has been drafted with smaller businesses in mind, with a pragmatic and principles-based approach. It was therefore deemed by the board to be the most suitable.
In 2017, the Board had already established an internal project to update its internal risk management procedures with a new enterprise risk framework based on the provisions proposed by COSO (Committee of Sponsoring Organizations of the Treadway Commission) with a view to incorporating a formal risk review agenda point in each board meeting. The adoption of the QCA Code has reinforced the underpinnings for this project and key principles of the Code have been incorporated into our risk management process. In addition, the adoption of the QCA Code has resulted in the Board preparing new terms of reference for its two key board committees (the Audit and Remuneration Committees) as well as a new schedule of matters reserved for the Board of Directors. In doing so, we also expanded the scope of the Remuneration Committee and have renamed it the Remuneration and Appointments Committee. The three new documents are available for download under the links below under Principle 9. The Board has also performed a self-evaluation exercise and reviewed succession planning.
The information set out in these Corporate Governance disclosures is reviewed annually and was last reviewed on September 14, 2018.
Sopheon’s Application of QCA Code Principles
The QCA Code identifies ten principles that focus on the pursuit of medium to long-term value for shareholders without stifling entrepreneurial spirit. In order to claim that the QCA Code has been adopted, it is necessary for a company to apply the ten principles and also to publish certain related disclosures. The ten principles and our disclosures in connection with each are given below.
1. Establish a strategy and business model which promote long-term value for shareholders
Sopheon’s mission is to help our customers achieve exceptional long-term growth and profitability through sustainable innovation.
Our guiding philosophy is to balance aggressive growth strategies with a focus on profitability, while also ensuring long term financial stability. We believe the combination of these three factors will maximise long-term value for shareholders. This belief has recently been underpinned by the establishment of a progressive dividend policy, relatively uncommon in our industry and at stage of development. The philosophy described above guides our internal strategic planning events, conducted annually in October with the participation of the Board and the extended management team of the group, and which looks ahead to refine a vision for a three year horizon. This event is also the springboard for the initiative and budget plan for the upcoming year. The plan and vision are communicated to all staff, and this communication is repeated and updated quarterly, after each board meeting.
More details about the group’s strategy and business model can be found on this website and are explained extensively in the most recent annual report, available here.
2. Seek to understand and meet shareholder needs and expectations
The Board engages with shareholders and the broader investment community via a variety of channels and activities:
- The annual general meeting, held in June each year in a central London location where investors can meet executive management and receive a presentation of the business alongside formal business. Notice of the AGM is published well in advance.
- Regular updates to shareholders via the annual report, interim report and regular announcements via the London Stock Exchange Regulatory News Service and its Reach service. Institutional presentations are also made following the annual and interim results each year, with ad-hoc meetings at other times. Our NOMAD finnCap provides detailed feedback of investor sentiment following such events.
- Ensuring frequent interaction with, and reports by, an external analyst firm. The Company has appointed Progressive Research, a well-known specialist in technology companies, to provide this service, as well as being a source of feedback to management. This is in addition to the analysis available from finnCap. Reports from Progressive are publicly available.
- A policy of rapid response to investor enquiries via our email@example.com email address and an investor alert service that individual and institutional investors can sign up to.
- Monitoring of the financial press, and popular online discussion forums
The Chairman and CFO are the primary contacts for investor interaction alongside finnCap, with the CEO who is based in the USA, also ensuring availability to meet investors during his frequent visits to Europe.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success
Sopheon’s culture is very open and this includes reaching out and seeking feedback and insights from our various stakeholders. In addition to the investor outreach described above, key practical elements of this philosophy for other stakeholders are given below.
- People are the lifeblood and key resource of our Group and we take great pains to ensure we understand our employees’ perspectives and needs, and that they understand the Group’s goals. We have a flat organization with few tiers of management. The extended management team, comprising almost 20 people meets quarterly to review financial, operational and strategic progress against our plans and to discuss hot topics. In addition, the Executive Directors and senior management hold a formal meeting at least once a month, and the CEO, CFO and extended management team conduct a weekly operations meeting. The quarterly meetings are immediately followed by a Board meeting, and then a presentation to all staff via web-meeting. Members of the management team are encouraged to debrief with their departmental staff following these sessions. These mechanisms and channels allow for very broad discussion and engagement with staff as a whole.
- Customer engagement is vital to ensure that we are responsive and market sensitive. In addition to our customer support and account management relationships, customers are invited to attend annual user forum events in both the Americas and Europe which allow for two way communication regarding their needs, our business and our solutions. In addition, a subset of key customers are invited to join a customer panel to provide more direct and specific input to our strategy and product roadmap.
- Broader market engagement is also achieved through close relationships with well-known technology sector business analysts such as Gartner and Forrester. Sopheon is positioned well in their reports, and has been named in over 50 Gartner research notes in recent years.
- As an office based business we have limited impact on the environment, however we are very conscious of and grateful to the communities in which we are located. All our offices are encouraged to dedicate working time to an activity that contributes to the community. For example, staff from one of our offices spent a morning at a women’s shelter and carried out extensive redecorations, and another office participated in a Toys for Tots drive, collecting gifts for needy children in the community.
4. Embed effective risk management, considering both opportunities and threats, throughout the organisation
The Board is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system can only provide reasonable, but not absolute, assurance against material misstatement or loss. The board believes that the group has internal control systems in place appropriate to the size and nature of its business and is satisfied that the scale of the group’s activities do not warrant the establishment of an internal audit function.
The board is also responsible for identifying the major business risks faced by the group and for determining the appropriate course of action to manage those risks. During 2017 the Board recognised the need to improve the way the Group manages the risks to our business objectives. A framework has been developed to provide guidance and a consistent method to facilitate the effective identification, assessment, and management of risks to the achievement of corporate objectives. The Framework is owned by the Board and is to be used by all staff when they identify a potential event, the consequences of which pose a threat to the achievement of corporate objectives. While tailored for Sopheon, the framework is based primarily on the COSO Enterprise Risk Management Integrated Framework 2004. COSO defines risk management as:
“A process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”
We use Accolade, our software platform, as the vehicle to facilitate the implementation of the risk management framework. The process is now being embedded into our quarterly meeting cycle, and will be a living process that delivers an important input to the management and Board meetings.
5. Maintain the board as a well-functioning, balanced team led by the chair
The Chairman leads the Board and is responsible for its overall effectiveness in directing the Group. He manages the Board agenda and ensures that all Directors receive accurate, timely and clear information and effectively contribute their various talents and experience in the development and implementation of the Group’s strategy. He ensures that the nature and extent of the significant risks the Group is willing to embrace in the implementation of its strategy are challenged and determined by the Board. The Chairman is responsible for ensuring that the Board implements, maintains and communicates effective corporate governance processes and for promoting a culture of openness and debate designed to foster a positive governance culture throughout the Group.
The Board currently comprises three Executive Directors and two independent Non-Executive Directors (NEDs). The Board believes that there is an appropriate balance between Executive and Non-Executive Directors on the Board. All Directors are encouraged to foster an attitude of independence of character and judgement. That said, the QCA Code suggests that as well as having a minimum of two NEDs, ideally at least half of the directors should be independent. In addition the two NEDs at Sopheon have each served on the Board for over 9 years and this may also lead to a lack of independence. The Board as a whole is satisfied that this is not the case, taking note of the fact that the two NEDs are mature, experienced and independent persons who have each succeeded in their own businesses; are not dependent upon income from the Group; have developed a strong and detailed understanding of the business; and are each prepared and able to intervene and challenge the executive directors without hesitation.
Given the size of the business, the Board considers that expanding the Board to appoint additional Directors purely for reasons of independence would not be in shareholders’ interests. However, in its future appointments the Board will seek to address the issue of independence. In addition, board members are currently put forward to shareholders for re-election every three years. Following the adoption of the QCA Code, the NEDs have proposed that they be considered for annual election, in line with best practice.
Scheduled Board meetings are held quarterly to review strategy, management and performance of the Group. The first meeting of the year is followed by a remuneration committee meeting, and this is repeated at subsequent meetings if required. There are also a minimum of two audit committee meetings a year, which are held to review and approve the group’s annual and interim reports and financial statements, and these meetings would typically involve the external auditors. Additional meetings between these dates are convened as required. Over the past year, all directors attended all meetings and applicable committee meetings, either in person or by conference call, for example to approve a material transaction. In addition, non-executive directors frequently visit with executives to provide one to one advice or as a sounding board. In total, it is estimated that the non-executive directors are required to give between 10-20 days per annum to the Company’s business. The Chairman dedicates 4 days a week to the Company, and the other two executive directors are full time.
6. Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
The Board is responsible for the overall management and organisation of the Group. At the highest level, the Board sets standards, policies and strategic aims; ensures the Group has the resources in place to meet its objectives; and monitors and reviews material strategic issues, financial performance and risk management. Given the highly specialized nature of the Sopheon business, the Board requires a diverse range of skills and knowledge covering the international software industry, sales and marketing, services delivery, and international finance including M&A and other corporate activities. We believe that having maturity and experience is vital, but so is having a strong entrepreneurial perspective.
The Board biographies given above demonstrate that our team collectively has these skills and characteristics, as well as the calibre needed to bring the right level of independent judgment to the Board. With particular reference to the NEDs, we note that one NED is a financial specialist and the other is an industry specialist, and both have had prior experience of working in a public company environment. Furthermore, one is US based and the other EU based, reflecting the geographical footprint of the Group. It is recognized that the Chairman being a major shareholder, risks individual dominance of the Board; however, the Board’s view is that the presence of strong independent NEDs mitigates this risk.
The Board recognises that while its membership does incorporate some ethnic diversity, all its members are male. Given the size of the business, expansion of the Board to appoint additional Directors purely for reasons of additional diversity is not considered to be in shareholders’ best interests. However, in its future appointments the Board will seek to appoint candidates who further address this matter. The Board also notes that several members of the Group’s management team are female.
The Board, typically via the Chairman and CFO, regularly receives advice from the Company’s NOMAD, lawyers, tax advisers, auditors and other financial advisers from time to time. The CFO acts as Company Secretary.
7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
A board self-evaluation process led by the chairman took place in July 2018, using a QCA sponsored questionnaire and process. All current directors began by completing the questionnaire, which focuses on the effectiveness of the board in areas largely aligned to the ten QCA corporate governance principles. These completed questionnaires were returned to the CFO for consolidation. Low scoring or divergent scoring responses were then discussed more extensively in the subsequent Board meeting, with gaps and actions for improvement identified. This was the first such formal process and the Board has agreed that this should be an annual event.
The Group’s HR function coordinates a high level succession planning framework for all key employees and this has been replicated at the board level for the Executive Directors in the event of a sudden departure. As the Group expands, additional senior management roles have been identified and these are approved in advance by the Board as part of the annual planning event. Typically these are recruited with the help of suitable executive search consultants. Future vacancies are identified in line with the three year vision and perspective also set at the planning event. Longer term succession planning for the Board itself could involve the need to identify both internal and external candidates for appointment to the Board.
8. Promote a corporate culture that is based on ethical values and behaviours
The extended management team has developed a detailed core values statement and guiding principles to support the Group’s culture, with a strong footing in ethical values. These are reinforced in the staff handbook and the staff appraisal and development process, which formally embeds cultural and ethical considerations as part of each employee’s self-evaluation.
Sopheon’s core values and guiding principles are reproduced below.
“As a company, and as individuals, we value integrity, honesty, openness, personal excellence, continual self-improvement, and mutual respect. We are committed to our customers and partners and have a passion for “Corporate Innovation Improvement”. We take on big challenges, and pride ourselves on seeing them through. We hold ourselves accountable to our customers, shareholders, partners and employees by honouring our commitments, delivering only the highest value and quality results. “
“The following eight Guiding Principles will help us measure the appropriateness of our decisions:
- Provide a great work environment and treat each other with respect and dignity;
- Teams are more powerful than individuals;
- Embrace business integrity as an essential component in the way we conduct ourselves;
- Be honest and open in all our interactions;
- Enthusiastically satisfy customers at all times;
- Promote continual self-improvement and learning;
- Contribute positively to our communities and our environment and
- Recognize that profitability is essential to our future success”
9. Maintain governance structures and processes that are fit for purpose and support good decision-making by the board
As noted above, formal board meetings are held quarterly to review strategy, management, and performance of the group, with additional meetings between those dates convened as necessary. The Audit Committee, which includes all of the non-executive directors and is chaired by Stuart Silcock, considers and determines actions regarding any control or financial reporting issues they have identified, or that have been raised by the auditors. The Remuneration and Appointments Committee is responsible for oversight of the contract terms, remuneration, and other benefits for executive directors, including performance-related bonuses. The committee comprises the two non-executive directors with Daniel Metzger as chairman, together with B.K. Mence, other than in with respect to his own remuneration.
Links to the terms of reference of the two Board Committees, as well as the schedule of Matters Reserved for the Board, are given below.
The Board will monitor the continued suitability and implementation of the QCA Code on an annual basis and revise its governance framework as appropriate as the Group develops.
10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders
The Group’s approach to investor and shareholder engagement is described under Principle 2 above. Annual reports, Annual General Meeting notices and other governance related materials since the year 2000 are available here.
The prior year annual reports contain a report from the Remuneration Committee, and a summary of the activities of the Audit Committee. Accordingly, further details of Audit Committee activities are provided here, pending the publication of the 2018 Annual Report. During the year, the Audit Committee met twice, and the external auditor and Executive Directors were invited to attend these meetings. Consideration was given to the external auditor’s post-audit reports and these provide opportunities to review the accounting policies, internal control and the financial information contained in both the annual and interim reports, as well as the independence of the external auditor. The committee chair is also able to meet with the auditors independently if required.
The outcome of all shareholder votes are announced immediately following the meeting. Historically, the Company has not been in a position where a significant proportion of votes have been cast against any resolution proposed to shareholders.
In the Board’s opinion, all required disclosures relating to QCA Code Principles 1-9 have been disclosed above.