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Governance

The Directors have reviewed the governance arrangements of The Quarto Group, Inc. in the context of the Combined Code, revised in June 2006. The principles of the Code have been applied as follows:

• a) The Board of Directors represents the shareholders' interests in maintaining and growing a successful business including optimising consistent long-term financial returns.
• b) The Board comprises of three executive Directors and three non-executive Directors. The non-executive Directors, P. Campbell (appointed March 26, 1998), P. Waine (appointed June 4, 1998) and L. Collins (appointed March 9, 1999) are considered by the Board to be independent, notwithstanding the fact that P. Campbell receives £15,000 for consulting fees and has 1,000 shares and that L. Collins has 337,650 shares.
• c) The Board meets six times a year. Each of the Directors, except for P. Campbell who missed one meeting due to illness, attended all of the meetings held during the year. A formal agenda is prepared for each meeting and all board papers and information are circulated to the Board forty-eight hours before the meetings.
• d) All of the Directors are subject to re-election by the shareholders at the Annual Meeting.
• e) The remuneration of the executive Directors is recommended by the Remuneration Committee, comprising P.Waine, P. Campbell and L. Collins. The Remuneration of non-executive directors is determined by the Board as a whole. A separate report with respect to Directors' remuneration is included on page 38 of the Annual Report. The Committee, which meets twice a year, does not have formal written terms of reference.
• f) The Chairman and the Finance Director are responsible for investor relations. They meet with major shareholders during the course of the year to ensure that they develop an understanding of their views, which are communicated to the rest of the Board at Board Meetings. The non-executive Directors meet with major shareholders from time to time. Shareholders are invited to attend the Annual Meeting at least twenty working days in advance of that meeting. The Chairman of the Audit and Remuneration Committee, P. Waine, who is also the Senior Independent Director, attends this meeting.
• g) The Audit Committee, comprising P. Campbell, P. Waine and L. Collins, is chaired by P. Waine and meets with the independent auditors at least twice a year. L. Collins provides the Committee with financial experience. The Committee regularly review at Board level the financial back up and facilities available at Head Office, as the Group continues to expand. The Committee has formal written terms of reference. The Committee monitors the level of non-audit fees paid to the auditors to ensure that their objectivity is safeguarded.
• h) The non-executive Directors meet to discuss the executive Directors with the Chairman present and also meet with the executive Directors without the Chairman present, in order to evaluate the performances of the Board.
• i) Quarto has arranged appropriate insurance cover in respect of legal action against the Directors.
• j) All Directors have access to the advice and services of the Company Secretary.
• k) All of the non-executive Directors attended all of the Audit Committee and Remuneration Committee meetings held during the year.

The Group complies with the provisions set out in Section 1 of the 2003 FRC Code, apart from those listed below. Where non-compliance is reported, this is because, in the opinion of the Board, it is not appropriate to change current practice due to the size and constitution of the Board. The provisions of the Combined Code not complied with are as follows:

• a) A2.1 - The Chairman of the Company is also the Chief Executive.
• b) A1.1 - A formal schedule of matters specifically reserved for the Board is not required, since the Board forms the executive management of the Group.
• c) A5.2 - The Company does not have any formal arrangements for Directors, in the furtherance of their duties, to take independent professional advice.
• d) B2.2 - The Remuneration Committee consists of three independent non-executive Directors, but, it does not have responsibility for the remuneration of senior management below the main Board level. P. Waine is the Chairman of the Committee.
• e) Schedule A1 - Performance related bonuses are not normally given.
• f) B2.1 - There are no terms of reference for the Remuneration Committee.
• g) A4.1 - The Company does not have a Nominations Committee. The Board as a whole is responsible for the appointment of its own members.
• h) A1.1 - The Group does not have formal "whistleblowing" procedures. However, the structure is flat and the line of communication is short. In addition, the Executive Board and the finance department carry out several visits per year to individual operating units.

The Board will continue to review its corporate governance arrangement, in the light of the Combined Code, as the Group develops and grows, and, in particular will review those provisions of the Combined Code that are not complied with currently.