ESB Corporate Governance

Financial statements

The Electricity Supply Acts 1927 to 1988 require the Board Members to prepare Financial Statements for each financial year in accordance with those Acts.

The Board Members consider that, in preparing the Financial Statements, appropriate accounting policies have been used and consistently applied, reasonable and prudent judgements and estimates have been made and all accounting standards considered applicable have been followed.

The Board Members have responsibility for keeping proper books of account and for taking such steps as are reasonably open to them to safeguard the assets of ESB and its subsidiaries and to prevent and detect fraud and other irregularities.

Corporate Governance

The "Combined Code" sets out principles of good governance and a code of best practice and is derived from the final report of the Committee for Corporate Governance and from the Cadbury and Greenbury reports. Companies listed on the Irish Stock Exchange are required to report on compliance with all provisions of the code.

ESB is a statutory corporation established under the Electricity (Supply) Act 1927 and as a result some of the provisions of the Combined Code are not applicable to ESB.

ESB supports the principles and provisions of the Combined Code and complies with its requirements, except:

• ESB is accountable to the Minister for Energy, Communications and Natural Resources. ESB has no share capital. Accordingly, code provisions relating to shareholder relations and conduct of Annual General Meetings are not applicable.
• Board appointments are a matter for Government and accordingly ESB does not have a nomination committee. Board Members, who are appointed for five and four year terms, are not subject to re-election to the Board at intervals not exceeding three years.
• ESB's policies in relation to remuneration of Executive Board Members (Chief Executive) are in accordance with "Arrangements for determining the remuneration of Chief Executives of Commercial State Bodies under the aegis of the Department of Public Enterprise", issued in July 1999.

Formal training procedures for new Board Members are being put in place. Principles of good governance

The ESB Board

The Board comprises twelve members and includes the Chief Executive and eleven Non-Executive Members, seven of whom are appointed by the Government for a five year term, and four worker members appointed by the Minister for Energy, Communications and Natural Resources for a four year term following election by staff. The roles of the Chairman, who is part-time, and Chief Executive are separate.

The Board agrees a schedule of monthly meetings to be held in each calendar year and also meets on other occasions as necessary. The Board has a formal schedule of matters specifically reserved to it for decision at the Board meetings. The Board Members, in the furtherance of their duties, can take independent professional advice as required, at the expense of ESB. All Board Members have access to the advice and services of the Secretary.

The Board Members receive monthly financial statements for the group and full Board papers are sent to each member a week before the Board meetings. The Board papers include the minutes of all Board sub-committee meetings which have been held since the previous Board meeting.

The relationship between ESB and the Department of Energy, Communications and Natural Resources is formally established in an "Agreement on Framework for Interaction between DPE and ESB" dated September 1998. This agreement provides a blueprint for the working relationship between the Department and ESB and the principles are set out under six priority areas - agreeing key policies, setting objectives, agreeing the high level strategy, agreeing special operating decisions, performance management and shaping/influencing the environment.

Board committees

Committees are established to assist the Board in the discharge of its responsibilities. The committees comprise an Audit Committee (see below), Business Performance and Development Committee, Capital Projects Committee, Environment and Safety Committee, ITSO Committee, International Business and Investments Committee, Legislation Committee and Remuneration and Management Development Committee.

Their members and the terms of reference are formally documented.

The Audit Committee, a formally constituted committee of the Board with written terms of reference, is composed of four Non-Executive Members and meets regularly. The Audit Committee reviews and discusses with the internal auditor and the external auditor, the group's internal accounting controls, internal audit function, choice of accounting policies, internal and external audit programmes, statutory auditors' report, financial reporting and other related matters. The internal and external auditors have full and unrestricted access to the Audit Committee.

In accordance with the requirements of the EU Electricity Directive the Board established a separate committee, the ITSO Committee, to facilitate the independent management of the Transmission System Operator (TSO) function undertaken by ESB National Grid/Eirgrid. The Commission for Electricity Regulation approved these ringfencing arrangements in accordance with regulations establishing a system of trading in electricity. Internal controls

The Board has overall responsibility for the group's systems of internal control and for monitoring their effectiveness. These systems are designed to provide reasonable but not absolute assurance against material misstatement or loss. In order to discharge that responsibility in a manner which ensures compliance with legislation and regulations, the Board has established an organisational structure with clear operating and reporting procedures, lines of responsibility, authorisation limits, segregation of duties and delegated authority.

The Combined Code introduced a requirement that directors of a listed company review the effectiveness of the company's systems of internal controls. This extends the existing requirements in respect of internal financial controls to cover all controls including financial and operational controls and compliance together with implementing a risk management framework.

ESB has in place a strong control framework which covers all areas of control. During the year, the Board further refined its process of review of the group's internal controls and risk assessment and undertook a review and evaluation of the business risks of the group and its systems of internal control. Towards year end 31 December 2000 the procedure for carrying out a detailed risk review and internal corporate governance sign-off procedure were changed from an annual to a quarterly basis.

The Board Members are satisfied that ESB now meets the requirements set out in the Turnbull guidance on internal control. The system of internal control includes the following:

• Clearly defined organisational structure, with defined authority limits and reporting mechanisms to higher levels of management and to the Board which support the maintenance of a strong control environment;
• Comprehensive budgeting systems with an annual budget approved by the Board;
• Comprehensive system of financial reporting. Monthly actual results are reported against budget and considered by the Board on a monthly basis. Any significant changes and adverse variances are questioned by the Board, and remedial action taken where appropriate;
• Comprehensive set of policies and procedures relating to operational and financial controls, including capital expenditure. Large capital projects require the approval of the Board, and are closely monitored on an ongoing basis by the Capital Projects Committee of the Board;
• A corporate governance framework which includes risk analysis, financial control review and formal quarterly governance statements by the Managing Directors of Business Units. This is monitored by the internal audit department, which reports to the Audit Committee on an ongoing basis;
• Consideration of operational and financial issues by special Board Committees
• Statement of Board Members' Responsibilities
• These controls are reviewed systematically by internal audit, which has a group-wide role. In these reviews, emphasis is focused on areas of greater risk as identified by risk analysis.

The Board, through the Audit Committee, has reviewed the effectiveness of the systems of internal control. The process used by the Audit Committee to review the effectiveness of the system of internal control includes:

• Review and consideration of the quarterly risk review process;
• Review and consideration of certifications from management of satisfactory and effective operation of systems of internal controls, both financial and operational;
• A review of the programme of internal audit and consideration of their findings and reports. Internal audit also report regularly on the status of issues raised previously from their own reports and reports from the external auditor;
• A review of reports of the external auditors, KPMG, which contain details of any material control issues identified or arising from their work as auditors.