Balfour Beatty plc (the "Company")
Notice of 2021 AGM, Forms of Proxy and Annual Report and Accounts
The Company announces that today it has made available to shareholders the following documents:
§ Notice of 2021 Annual General Meeting ("Notice of 2021 AGM");
§ Forms of Proxy for the AGM; and
§ Annual Report and Accounts for the year ended 31 December 2020 ("2020 ARA").
The documents listed above are available on the Company's website at https://www.balfourbeatty.com/investors. Paper copies will be mailed to shareholders who have elected to receive them.
In compliance with Listing Rule 9.6.1, these documents have been submitted to the Financial Conduct Authority, and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
Format of the 2021 AGM
The Company's 2021 AGM will be held at 10.00am on Thursday 13 May 2021 at The Curve Building, Axis Business Park, Langley, Berkshire, SL3 8AG.
According to current government guidance, restrictions will still be in place on the date of the 2021 AGM that prohibit indoor group gatherings, restrict travel and mandate a policy of social distancing due to the risk of Covid-19. It is therefore currently intended that the 2021 AGM will be held as a closed meeting convened with the minimum quorum stated in the Company's Articles of Association. The Company intends to facilitate the quorum of shareholders for this meeting. All other shareholders should not attempt to attend the 2021 AGM in person, in order to protect the health and safety of fellow shareholders and our staff, and will not currently be permitted admission if they intend to do so.
As the 2021 AGM will be a closed meeting, shareholders are strongly encouraged to appoint the Chair of the meeting as their proxy to exercise their right to vote at the 2021 AGM in accordance with their instructions. Further details including how shareholders can vote by proxy and ask questions in advance of the meeting can be found in the Notice of 2021 AGM. The Company will continue to closely monitor government guidance and legislation in relation to Covid-19 and any changes to the arrangements will be notified to shareholders through our website.
2020 ARA
A condensed set of financial statements were appended to the Company's full year results announcement, issued on 10 March 2021, which included an indication of important events that occurred during the year. That information, together with the information set out in the Appendix to this announcement regarding the Company's principal risks and uncertainties, related party transactions and directors' responsibility statement, as extracted from the 2020 ARA, constitute regulated information which is to be communicated to the market in full unedited text through a Regulatory Information Service in accordance with DTR 6.3.5R.
Page and note references within the Appendix below refer to page numbers in the 2020 ARA. To view the full year results announcement, please visit the Company's website at https://www.balfourbeatty.com/investors/.
This material should be read in conjunction with, and is not a substitute for, the full 2020 ARA.
General enquiries:
Contact and telephone number for queries /
Duly authorised officer of issuer responsible for making notification:
Tracey Wood, Group General Counsel and Company Secretary
Tel. +44 (0)20 7216 6800
Analyst/investor enquiries:
Angus Barry
Tel. +44 (0)7966 281 635
angus.barry@balfourbeatty.com
Media enquiries:
Antonia Walton
Tel. +44 (0) 7966 929 633
antonia.walton@balfourbeatty.com
Notes to editors:
· Balfour Beatty is a leading international infrastructure group with 26,000 employees driving the delivery of powerful new solutions, shaping thinking, creating skylines and inspiring a new generation of talent to be the change-makers of tomorrow.
· We finance, develop, build, maintain and operate the increasingly complex and critical infrastructure that supports national economies and deliver projects at the heart of local communities.
· Over the last 112 years we have created iconic buildings and infrastructure all over the world including: the £1.5 billion A14 improvement scheme - Britain's biggest road project; Hong Kong's HK$5.5 billion world-class harbour theatre project for the West Kowloon Cultural District Authority; and the 12.5 mile $429 million North Metro Commuter Rail line in Colorado, US.
APPENDIX
1) Principal risks
Removing uncertainty through understanding
Balfour Beatty's decision-making is centred on a comprehensive and detailed understanding of the exposures faced by the organisation. The identification of risks to achieving business and strategic objectives, alongside the use of detailed analysis to inform and prioritise responses, remains key to balancing risk taken in line with risk appetite. The principal and emerging risks are mapped to strategic business plans to ensure a comprehensive coverage of risks, allowing the Board to undertake a robust assessment of the potential exposures faced by the Group and whether these represent new, increased or decreased threats and the level of response required to manage them. The risk profile comprises both interconnected and discrete risks at strategic, operational and project level and focuses on understanding the worst-case scenarios that could threaten the Group's strategy and business model. As a result, changes in the Group's risk profile and movements in some of the principal risks have been identified and are described on pages 94 to 101.
| Description and impact | Causes | Mitigation | |
| 1 Health and safety | | | |
| The Group works on and delivers significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks. What impact it might have Failure to manage these risks presents the potential for significant harm, including fatal or life-changing injuries to employees, subcontractor staff, third parties or members of the public. It also presents the threat of potential criminal prosecutions, significant fines, debarring from contract bidding and reputational damage.
| Some common themes which could drive health and safety risks include: • inadequate risk identification/assessment; • lack of competence; • processes that fail to deliver risk elimination or mitigation; • lack of clear safety leadership, impacting broader safety culture; • ineffective management of subcontractors, JV partners and other third parties; • failure to cascade and follow Health and Safety procedures; and/or • lack of focus on the wellbeing and mental health of staff faced by daily work and life pressures. | Balfour Beatty's Zero Harm Strategy and its supporting policies and procedures remain embedded and act as a key control in managing the risk. The strategy and associated action plans are reviewed and monitored by management and external accreditation bodies. Experienced and competent health and safety professionals provide advice and support, monitor culture and undertake regular reviews. The Safety and Sustainability Committee of the Board and business Health and Safety executive leadership teams, meet regularly throughout the year to capture lessons learned and develop a consistent approach to health and safety best practice. Training programmes (including behavioural) are in operation across the business.
| Owner Safety and Sustainability Committee Risk movement No movement Well-established controls and mitigations continue to remain in place throughout the Group and represent a stable control environment. Multiple failures within this environment would be required for the risk to be realised. |
| 2 Managing Commercial Terms | | | |
| The Group delivers high profile, complex projects that can often carry specialised deliverables together with intricate, multifaceted and sometimes onerous commercial terms. Delivering contract obligations alongside the supply chain, for Balfour Beatty's customers, whilst protecting the interests of all parties, maintaining a profitable and sustainable order book, and delivering stakeholder value, can pose an element of risk. What impact it might have Failure to fully understand or manage the application of commercial terms across contracts can result in the use of valued time and associated cost of resource to manage any disputes, potential losses or reduction in profits and damage to relationships with key customers and supply chain partners. Failure to effectively engage and collaborate with customers and supply chain around managing terms could also result in the Group opting out of certain works or even may limit access to targeted markets in the future.
| Key causes that could drive this risk include: • lack of clearly defined bid strategy; • misalignment between Balfour Beatty and client approach; • working with a new or unknown customer with no known established relationship; • supply chain lacking the capability to accept and manage back-to-back terms, resulting in increased risk carried by Balfour Beatty; • failure to engage in an early collaborative approach with the customer; • lack of balanced approach to allocation or sharing of risk; and/or • lack of early identification of a contracting strategy between all parties.
| The Group Tender and Investment Committee reviews and challenges all proposals in line with minimum commercial expectations. Defined delegated authority levels are in place for approving all tenders and infrastructure investments. Customer adoption of the UK Government Construction Playbook steers an approach towards increased collaboration, which results in reduced risk, and an increased focus on quality of bid rather than being solely cost focused. A 'getting left early' approach adopted prior to the procurement process enables influence over contracting and procurement model to two-stage tender, supports an early collaborative, solution-based approach with customers and minimises risk on both sides. A wide and ongoing range of work winning initiatives (including Cash is our Compass, High Value Selling and the Win Business Leadership community of practice) are in place across the Group to drive increased commercial and customer awareness and further embed an understanding of expectations on margins and cost. The Gateway review process highlights key commercial risks closely aligned to Group Circles of Risk to ensure adequate qualification and mitigation of key exposures. Monthly business reviews pick up any early indicators with potential for disputes arising on contracts, including across the subcontractor base. | Owner Group Tender and Investment Committee
Risk movement No movement Current controls champion a more collaborative approach with customers to manage the risk. Controls to mitigate the likelihood and impact by preventing the Group from bidding for unsustainable work and therefore limiting any potential exposure, remain key. Following a review of the Work Winning risk, this has now been refocused on understanding and managing commercial terms.
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| 3 Project delivery | | | |
| Failure to deliver projects in line with customer expectations and required specifications, on time and on budget and minimise the risk of increased costs, delay related damages and defect liabilities. What impact it might have Failure to manage and/or deliver against customer expectations, scope specifications and key deliverables in line with schedule and budget could result in issues such as design issues, contract disputes, rejected claims, liquidated damages, cost overruns and failure to achieve anticipated customer savings which in turn could reduce the Group's profitability and damage its reputation. The Group may also be exposed to long-term obligations including litigation and costs to rectify defective or unsafe work. Delivery failure on a high-profile project could result in significant reputational damage, debarring from future work and significant associated costs of rectification or dispute resolution.
| Failure to implement, maintain and challenge operational and commercial controls (as detailed within checklists at Gateway reviews) allowing: • unrealistic programming targets; • inadequate resource (people, plant and materials) or competency of resource; • lack of comprehensive understanding of contract obligations; • unrealistic progress assessments and cost to complete judgements which could arise due to poor training, lack of supervision, lack of accountability or fear of reporting bad news; • overly optimistic claim recovery assumptions; • incomplete visibility and appreciation of scale of commercial judgements; • failings in administering the contract terms to safeguard or protect future claims, change orders and extensions of time (EOTs); and/or • poor management and selection of subcontractors. Customer intervention and additional pressure to complete a project may also contribute to realisation of this risk. | A continued focus on identifying and reporting risks, including planning, programme accuracy of cost and cash forecasting and resource reviews is maintained through the Gated Business Lifecycle. Early engagement of integrated work winning and project delivery teams across the Gateway processes to ensure customer expectations are understood and realistic. Deployment and ongoing monitoring of strong commercial management and contract administration processes through the project lifecycle. Optimal scheduling of key staff and associated competencies within project delivery teams and senior management, with ongoing and focused training. The site mobilisation hub facilitates early and effective start-up on site. Use of innovative and cost-effective engineering and technical solutions (including the vision for 25% offsite fabrication by 2025). Drive for defect-free delivery including digital progressive assurance of project delivery. Professional indemnity cover in place to provide further financial safeguards. Prequalification and competency/capacity verification of supply chain partners, with performance of subcontractors and suppliers monitored closely throughout the project lifecycle.
| Owner Group management Risk movement No movement Consistent application of the Group's reporting systems and diligent use of short interval control processes remain in place across all stages of project delivery, providing greater certainty of operational outcomes. However it is acknowledged that continued verification of the effectiveness of controls remains key to managing this risk, hence no reduction in risk exposure.
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| 4 Joint ventures | | | |
| Failure to implement robust controls around the selection of joint venture (JV) partners, define a clear governance structure or establish a 'one team' culture may result in failure to deliver expected returns and minimise the risk of unexpected liabilities. What impact it might have Not selecting the right JV partner who aligns to Balfour Beatty's culture and values could result in a mismatch of partner objectives, which flows through to ineffective delivery of contract requirements and a misalignment in approach resulting in a significant impact to profitability and reputational damage. The failure of a JV partner may expose the Group to increased resourcing costs and ongoing liability, warranty and insurance risks. Disputes with JV partners could impact the Group's ability to operate successfully and/or expand within its chosen markets. Failure to share and meet the Group's health and safety management expectations could result in increased potential for injury and/or fatality. | The risk could be realised through: • ineffective assessment of potential JV partners including liquidity, capacity and capability; • failure to ensure 'fit for purpose' terms with the right JV partner; • lack of clarity of the delegated levels of authority between partners; • delayed and fettered decision-making process between partners; • segregation of management systems (financial and operational); • lack of understanding of contract requirements and expectations; • lack of oversight over JV reporting and application of processes implemented across the project; and/or • failure to align Balfour Beatty and JV partner cultures, values and practices.
| The Group Tender and Investment Committee process also applies to all joint venture proposals. The Group's primary course is to self-deliver projects where possible rather than as part of a JV, whilst recognising that establishing the right partnership can be an opportunity to deliver work. Appointment of an appropriately constituted JV Board to act as the main governance vehicle for the Group. The Gated Business Lifecycle provides governance over the selection of JV partners, and highlights partner related risks, closely aligned to Group Circles of Risk including those related to capacity, capability, previous experience with the Group and liquidity. Experienced project directors are appointed to manage the JV and provide an ongoing assessment of operational delivery risk. Good practice, including the use of joint reporting systems where appropriate, is shared between all partners to embed the Group's expectations and culture throughout JV delivery teams. Balfour Beatty monitors the performance of its JV partners throughout the lifecycle of a project. | Owner Group Tender and Investment Committee Risk movement - No movement Whilst there has been significant improvement in the process for entering JVs, the longer-term effect of this on the risk remains to be seen - ongoing exposure continues. |
| 5 Data protection | | | |
| The Group is exposed to a significant data breach that results in a breach of the General Data Protection Regulation (GDPR). What impact it might have Crystallisation of this risk has the potential for: • legal and regulatory proceedings, investigations or disputes and associated costs; • operational impact (disruption to business as usual); • costs and losses, fines and penalties; • reputational harm and potential debarment; and • data subject rights process failure. | A data breach may be experienced due to: • ineffective training/lack of competency; • third-party error; • system failure, lack of system capability or system breach; • malicious act (internal/external); • lack of awareness; • unforeseen or sudden increase in data handling; • human error; and/or • lack of corporate accountability.
| HR Data Protection Coordinators and Data Privacy Champions remain embedded throughout the business to ensure breaches are reported promptly and risks are appropriately escalated to the Group Data Protection Officer (GDPO) for consideration and assessment. Senior Information Risk Officer acts as Executive Committee representative for data protection. All employees undertake annual training in data protection and information security management. Implementation of standardised systems (including One Trust for managing data subject access requests (DSAR) and incidents) and appropriate policies, procedures and standard templates driving a culture of privacy across the organisation. Increased engagement with Site of the Future teams allows for early involvement in IT initiatives from a privacy and data governance perspective. | Owner Group management Risk movement Decreased Implementation of increased controls since the introduction of GDPR has reduced overall exposure.
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| 6 Cybersecurity | | | |
| A failure to protect key Company and employee data or other confidential information resulting from a breach of system security. What impact it might have Realisation of this risk could result in: • reputational harm (loss of market and customer confidence); • potential fines and prosecution; • loss of intellectual property and competitive advantage; and • operational impact restricting ability to carry out business critical activities (disruption to business as usual).
| Several internal and external factors could contribute to the realisation of this risk such as: • poor internal governance; • failure to embed preventative culture; • increased exposure to phishing attacks and ransomware due to increased use of personal devices and remote working; • lack of retention policy applied to data; • operational failure. • inconsistent approach to data security with joint venture / external partners; • increased use of cloud services without equivalent investment in modern threat prevention; and/or • cyber attack.
| The risk is managed via the following controls: • network and endpoint protection, encryption, patching and data back-up; • awareness training with mandated annual refresher in place across all users; • employee vetting; • data governance framework regularly reviewed, and supported by policies and certifications; • incident management feedback mechanism (embeds lessons learned); • partner and supplier controls in place including vendor risk management assessments and established relationships with external security authorities; • roll out of One Drive to all users across the estate, enabling secure data storage in Microsoft cloud; • infoSec actively monitoring for security incidents and remediating where necessary; • privileged access to all core systems subject to multi-factor authentication; • systems run security agents for additional (24x7) monitoring; and • legacy operating systems removed or minimised, including upgrade and removal of employee legacy mobile devices. | Owner Group management Risk movement No movement Whilst a potential impact increase in line with increased attempts is being seen more broadly across other sectors and organisations, increased resilience as a result of improved controls and ongoing governance has meant no material change to this risk.
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| 7 People and talent | | | |
| Inability to attract and retain the required levels of skilled and competent staff and key talent to deliver project commitments and meet the Group's objectives. What impact it might have Failure to recruit and retain appropriately skilled people or grow in-house talent could harm the Group's ability to win or perform specific contracts, manage delivery cost increases, grow business and/or meet strategic objectives including acquisition of future order book. A high level of staff turnover or low employee engagement could result in a loss of competency, reducing business confidence within the market, a loss of stakeholder confidence and an inability to drive business growth or improvements. | A failure to effectively mitigate the Group's people risks may arise through: • overbidding or ineffective workload and location scheduling; • overheating of market causing significant increase in demand or competition for people, specifically in certain sectors and regions; • lack of visibility of long-term pipeline or perceived career progression resulting in existing workforce leaving the Group or sector; • inability to recruit and retain strong performers; • failure to maintain a culture of pride and advocacy across the workforce; • ineffective and or lack of adequate investment and decision making in the development of existing skills and capabilities; • lack of a diverse workforce; and/or • issues throughout labour supply chain including impact of Brexit/ onerous immigration controls.
| Providing a positive working environment to support the development of its employees has been central to Build to Last. Specific controls to mitigate this risk include: • implementation of HR strategy and plan and associated measurement of KPIs to inform decision making against budgets; • a focus on strategic workforce planning protocol to prevent resource conflicts; • work winning and project delivery aligned to internal and external recruitment activities, with early review of people and resourcing needs via GBL to ensure adequate capability and capacity to deliver work prior to bidding; • competency frameworks within core job families identify and support the development of key knowledge, skills and expertise; • recruitment and retention rates are measured and regularly reviewed across all parts of the business, with succession plans identified for core disciplines; • annual PPR (people and talent reviews), with regular reviews of remuneration and incentive arrangements to ensure they are appropriate to help the Group attract, motivate and retain key employees; • Group-wide employee engagement surveys are undertaken to measure engagement and appropriate actions are developed and communicated; • the Balfour Beatty Academy has been established in the UK to support professional and personal development in line with role requirements; • Training Needs Analysis and competency tools (COMEA) identifies role capability requirements and highlights development gaps to inform investment decision making; • strong employee communication channels are in place celebrating individual, business and Group-level successes and increasing visibility of future pipeline and opportunities; • affinity networks established to create a diverse and inclusive working environment; and • emerging talent is supported by strong graduate, apprenticeship, trainee and industrial placement/internship schemes. | Owner The Board Risk movement No movement Through Build to Last, Balfour Beatty has created a culture with strong people policies and processes which continue to mitigate this risk. The Group will monitor the impact that any delays to strategic projects has on the availability of skilled resource.
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| 8 Sustaining focus on build to last strategy | |||
| The Group does not sustain and build upon the strong foundation and culture created through its Build to Last strategy. What impact it might have Inconsistency in working practices and siloed cultures could drive inefficiencies including increased costs and operational errors resulting in reputational harm impacting all of the Group's stakeholders as well as an impact on the Group's ability to deliver sustainable profitable growth.
| Failure to deliver and/or demonstrate sustained focus and momentum could arise from: • complacency and/or localised adaptations within core disciplines or siloed cultures; • ineffective communication and reinforcement of messaging through a lack of leadership; • inadequate resourcing (financial, physical assets and people); • new systems and processes being used without appropriate controls being in place and/or tested; and /or • new people joining the organisation (including in leadership roles).
| Ensuring Build to Last continues to deliver and demonstrate value is a strategic priority for the Group and is led by the Group Chief Executive. Controls include: • continuous measurement and reporting of KPIs aligned to Lean (cash flow and profit from operations), Expert (employee engagement), Trusted (customer satisfaction), Safe (Zero Harm) and Sustainable (carbon emissions) within each business unit; • refreshed cultural framework under Build to Last with associated engagement and embedment in systems and processes aligning the UK and US under one unified cultural framework and reinforcing expected values and behaviours • senior leadership team well experienced in delivering business transformation successfully with clear and frequent senior leadership engagement across the businesses; • upskilling, training and development initiatives at key levels throughout the business to reinforce Build to Last principles in key job families i.e. commercial, project management, engineering etc; and • induction, recognition and PDR approach heavily weighted around Build to Last principles and culture including expected values and behaviours. | Owner The Board Risk movement Decreased The recent launch of the refreshed Cultural framework and associated values and behaviours has strengthened and reinforced Build to Last principles and disciplines across the business - improved oversight via regular reporting and discussion around KPIs has reduced risk overall. Continuous messaging and reinforcement across all employee touch points remains key. |
| 9 Financial strength | | | |
| The Group's inability to maintain the financial strength required to operate its business and deliver its objectives. What impact it might have Failure to protect and effectively deliver the required financial strength will mean the Group: • fails to meet financial covenant tests, as set out in its financing facility agreements, leading to a default event if not remedied within a specific grace period; • fails to pass the required tests that allow it to continue to use the going concern basis of accounting in preparing its financial statements; • loses the confidence of its chosen markets; and/or • loses the ability to compete for key long-term contracts that are critical to its viability and delivery of its long-term objectives. | Failure to manage financial risks, including forecasting material exposures, and the financial resources of the Group that underpin its ability to: • meet ongoing liquidity obligations so that it remains a going concern; and/or • meet financial covenants as set out in financing facility agreements.
| The Group continues to operate within a low financial risk environment. On 1 July 2020 the Group redeemed in full its preference shares for £112m, reflecting its continued strong liquidity position. The Group operates with a centralised Treasury function that is responsible for managing key financial risks, cash resources and the availability of liquidity and credit capacity. The Group maintains significant undrawn term committed bank facilities with a banking group of high credit quality to underpin the liquidity requirements of the Group. The Group maintains significant bank and surety bonding facilities to deliver trade finance requirements of the Group on an ongoing basis. The Group operates standardised reporting, forecasting and budgeting financial processes. This allows monitoring of the impact of business decisions on financial performance over future time horizons. Assets from the Investments portfolio can be sold to generate cash. | Owner The Board Risk movement No movement Controls within Finance and Treasury functions continue to demonstrate a clear ability to manage existing and anticipated risk. |
| 10 Supply chain | | | |
| Supply chain partners fail to meet the Group's operational expectations and requirements in relation to capacity, competency, quality, financial stability, safety, environmental, social and ethical. What impact it might have Failure in delivery by, or management of a subcontractor or supplier, would result in the Group becoming involved in disputes, having to find a replacement or undertaking the task itself. This could result in delays, business disruption, additional costs or a reduction in quality/increased defects owing to lack of expertise or competency. Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment.
| Crystallisation of capacity, competency and stability risks to the Group's supply chain may arise through: • lack of capacity or failing to retain subcontractors in a buoyant market\ over-reliance on a limited number of suppliers or a failure of key supplier relationships; • failure to embed the Group's expectations within the procurement process; • inadequate assessment of supply chain partner capabilities, capacity and process (including liquidity, quality, safety, ethics, materials stewardship, child labour, forced labour and modern slavery); • lack of supplier resilience (due to economic uncertainty including Brexit or any lagging effects seen as a result of COVID-19 and artificial 'propping up' from the furlough scheme); • failure to accurately assess project resource requirements and key deliverables; • impact from Brexit including increased tariffs and delays; • lack of adequate oversight, supervision or management during delivery; and/or • unethical treatment of the supply chain. | The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations and dependencies. This includes relationship mapping with strategic suppliers, lessons learned from previous projects together and briefing on order book requirements. The Group has undertaken significant work to identify and understand who its key supply chain partners are, reducing the number to 40 known core partnerships. The risk management framework and the Gateway review process allow for early (Gates 1-4) and ongoing (Gate 6) assessment of the appropriateness of resource allocation and dependencies and development of procurement strategies. Pre-qualification accreditation in place for core suppliers (validated in Gates 1-3), with oversight of supplier metrics and overall 'health'. Contingency plans address potential subcontractor failure, including replacement supplier list. A central database tracks individual subcontractor scoring in relation to capacity, compliance, performance and financial health. The Group obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency. Suppliers and subcontractors reviewed for third-party suitability compliance via PAS 91 Assessment (Industry Standard). Group-wide Code of Conduct and Supplier Code of Conduct, targeted training programmes and related policies and procedures in place. | Owner Group management Risk movement No movement The Group continues to be diligent in its assessment of its supply chain. The reduction in the number of active suppliers and increased system solutions to track performance and metrics throughout operational delivery improve oversight.
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| 11 code of conduct compliance | |||
| Failure to comply with the Code of Conduct across the Group including employees, JV partners, and within the supply chain. What impact it might have Failure to comply with the Code of Conduct and Balfour Beatty values could leave the Group exposed to: • instances of bribery and corruption; • fraud, deception, false claims or false accounting; • unfair competition practices; • human rights abuses, such as child and other labour standards generally, illegal workers, human trafficking and modern slavery; • unethical treatment of and by the supply chain; and/or • ethics and values being compromised as a result of commercial pressures. Failures could result in legal proceedings (including prosecution under the UK Bribery Act), investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment.
| Failure to comply with the Code of Conduct and Balfour Beatty values could arise from: • failure to adopt a risk-based approach; • failure to establish appropriate corporate culture; • failure to embed the Company's values and behaviours through the organisation; • lack of effective training programme and compliance monitoring; • failure to have a robust testing and monitoring programme in place; • lack of appropriate whistle blowing processes including ensuring awareness of such outlets across the organisation; and/or • deliberate or reckless non-compliance.
| A Group-wide Code of Conduct and Supplier Code of Conduct, and related policies, procedures and training are in place, promoted, monitored and assessed by the Business Integrity function. The function provides business integrity reports to the Board biannually and has its full support. Each business unit, supported by the Business Integrity function, is responsible for embedding the Code of Conduct and the Company's values and behaviours within its operations. The Group has a range of operational controls (commercial, including procurement, due diligence and risk assessment) that are designed to identify and manage risks internally and with third parties. An independent third-party whistleblowing helpline and dedicated email contact are in place and actively promoted. All in-scope complaints are independently investigated by the Business Integrity function and appropriate action is taken, where necessary. Balfour Beatty works with a limited number of agents, all of whom are, in addition to the Group's due diligence and approval process, subject to specific contractual clauses, policies and agreements. Use of a central database to track supplier and subcontractor performance history providing insight into their internal operating processes, governance and values.
| Owner The Board Risk movement Decreased The Business Integrity function continues to actively promote the required behaviours and learning tools to comprehensively support the Group's conduct and compliance objectives. The risk is assessed as having reduced due to the consistent application of these controls.
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| 12 Legal and regulatory | | | |
| The Group does not respond to any change in relevant legal, tax and regulatory requirements in a timely manner. What impact it might have The Group could face legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and exclusion from bidding. Such action could also impact upon the valuation of assets within the affected territory as well as have an impact on shareholder confidence.
| A failure to recognise or adapt to potential impacts arising from changes in applicable laws affecting the Group's businesses may result from: • lack of awareness of any changes in law or regulations made; • ineffective communication of the requirements across relevant business units; and/or entering into new markets and/ or sections with limited expertise and due diligence.
| The Group monitors and responds to tax, legal and regulatory developments and requirements in the territories in which it operates. Changes in the law and the requirements of them are clearly cascaded to all affected businesses. Local legal and regulatory frameworks are considered as part of any decision to conduct business in a new territory. Appropriate and responsive policies, procedures, training and risk management processes are in place throughout the business.
| Owner The Board Risk movement No movement Unforeseen exposure to legal and regulatory change is considered extremely unlikely- the controls embedded across the Group are considered effective in managing this risk. |
| 13 Legacy pension liabilities | |||
| The Group is exposed to and must therefore effectively manage significant defined benefit pension risks. What impact it might have Failure to manage these risks adequately could lead to the Group being exposed to significant additional liabilities due to increased pension deficits. This has the potential to affect the ongoing sustainability of the Group as well as incur reputational harm.
| The Group is unable to ensure that the trustees of the pension funds react effectively to or manage: • changes in interest rates or outlook for inflation; • an increase in life expectancies; • regulatory intervention or legislative change; • prudent funding assumptions; and/or • investment performance of the funds' assets.
| The Group constructively and regularly engages with the trustees of the pension funds to ensure that they are taking appropriate advice and the funds' assets and liabilities are being managed appropriately. This includes quarterly performance reporting and investment committee meetings in which the Company is represented. The funding and investment arrangements of the pension funds are subject to an in-depth triennial valuation and funding review with regular monitoring in years between. The Group's main UK fund has hedged in excess of 80% of its exposure to interest rate and inflation movements.
| Owner The Board Risk movement No movement Triennial funding review of the main UK fund was completed in January 2020. Diverse investment portfolio remains in place, with regular review on the trade off between risk and cost. No change in risk. |
| 14 Economic uncertainty | | | |
| The effects of national or market trends including political or regulatory change, may cause customers to re-evaluate existing or future infrastructure expenditure and the procurement of services. It may also lead to changes in the price and availability of labour and products. What impact it might have Any significant delay or reduction in the level of customer spending or investment plans could adversely impact the Group's strategy and order book, reduce revenue or profitability in the near or medium term, and negatively impact the longer-term viability of the Group. Restrictions on the availability of skilled labour and competitively priced materials could lead to increased costs and hence potentially a devaluation of the business. Financial failure of a customer, including any government or public sector body, could result in increased financial exposure to counterparty risk. | Potentially negative impacts related to the effects of: • customers postponing, reducing or changing expenditure plans including any delays in funding or planning associated with COVID-19; • wider than expected fluctuations in inflation; • lagging effects from Brexit - e.g. inflation, exits from market or lack of UK investment having a knock-on effect; • increased competition (e.g. in the UK from foreign investors acquiring competitors); • political change in both the UK and the US (new US administration may have potential impact on Federal spend); • increased supply chain risks (e.g. solvency, people and materials); and/or • reduced revenue or pressure on margins. | The Group primarily operates across three geographies (UK, US and Hong Kong) and three sectors (Construction Services, Support Services and Infrastructure Investments). This balanced portfolio of projects provides resilience and stability as the Group is less exposed to a downturn in a single geography or sector. The Group continues to actively monitor market trends and potential impacts. A well-established cross-functional Brexit working group remains in place following the end of the transition period. The financial solvency and strength of counterparties is always considered before contracts are signed and assessments are updated and reviewed whenever possible during the project lifecycle. The business also seeks to ensure that it is not over-reliant on any one counterparty. The annual review of market forecasts continues to remain a core part of the Group's Budget and Plan processes, and a focus on medium-term market outlook is considered and presented by each Strategic Business Unit.
| Owner The Board Risk movement No movement Whilst there has been some shorter-term movement seen, including opportunities associated with government infrastructure spend, the longer-term outlook remains uncertain. |
Other risks
Climate change
Whilst climate change is not currently considered to be a principal risk to the business, it has been included as a risk on the Group Risk Register in 2020. The establishment of a sustainability specific functional risk register ensures the identification and management of climate related risks at a granular level to inform any movement or assessment at Group level.
Climate change increasing the intensity and frequency of weather events, infrastructure being deemed incompatible with targets and tightening of environmental legislation are identified as some the key drivers of the risk. It is acknowledged that whilst there remains risk associated with climate change to the Group's business, it also presents a significant opportunity as Balfour Beatty works alongside clients to be part of the solution.
Further commentary on the potential impacts of climate change and Balfour Beatty's approach to managing them is set out in the sustainability section on pages 55 to 70. Climate change risk is on pages 63 and 64.
Brexit
Following the end of the UK's transition period on 31 December 2020, which ended previous exposures associated with the prolonged uncertainty around the terms of exit, the Group risk register no longer captures Brexit as a stand-alone risk. Any ongoing potential impacts or factors associated with Brexit are reflected as part of broader Group risks around supply chain and economic uncertainty.
Common industry-wide risks
In parallel with those principal and emerging risks identified and managed by the Group, Balfour Beatty faces significant risks and uncertainties that are prevalent to many companies - including financial and treasury, communications and marketing, regulatory reporting, information management, business continuity and disaster recovery, and general hazard risks.
2) Related party transactions
Joint ventures and associates
The Group has contracted with, provided services to, and received management fees from, certain joint ventures and associates amounting to £345m (2019: £334m). These transactions occurred in the normal course of business at market rates and terms. In addition, the Group procured equipment and labour on behalf of certain joint ventures and associates which were recharged at cost with no mark-up. The amounts due from or to joint ventures and associates at the reporting date are disclosed in Notes 24 and 25 respectively.
Transactions with non-Group members
The Group also entered into transactions and had amounts outstanding with related parties which are not members of the Group as set out below. These companies were related parties as they are or were controlled or jointly controlled by a non-executive director of Balfour Beatty plc.
| | 2020 £m | 2019 £m |
| Sale of goods and services | | |
| Anglian Water Group Ltd+ | 5 | 19 |
| URENCO Ltd | - | 2 |
| Purchase of goods and services | | |
| Anchor QEA, LLC | 1 | - |
+ Anglian Water Group Ltd ceased to be a related party of the Group on 31 March 2020 following the retirement of Stephen Billingham as chairman from the board of Anglian Water. The sales of goods and services to Anglian Water Group Ltd represents the sales carried out in periods up until his retirement.
All transactions with these related parties were conducted on normal commercial terms, equivalent to those conducted with external parties. At 31 December 2020, there were no amounts owed by or to these related parties (2019: £nil) and no guarantees have been given or received and no expense has been recognised in either year for bad or doubtful debts in respect of amounts owed by related parties.
Compensation of key management personnel of the Company
| | 2020 £m | 2019 £m |
| Short-term benefits | 2.610 | 3.034 |
| Share-based payments | 1.278 | 1.314 |
| | 3.888 | 4.348 |
Key management personnel comprise the executive Directors who are directly responsible for the Group's activities and the non-executive Directors. The compensation included above is in respect of the period of the year during which the individuals were Directors. Further details of Directors' emoluments, post-employment benefits and interests are set out in the Remuneration report on pages 134 to 150.
3) Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law and have elected to prepare the parent Company financial statements in accordance with UK accounting standards and applicable law, including FRS 101 Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of the Group's profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable, relevant, reliable and prudent;
• for the Group financial statements, state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and, as regards the Group financial statements, International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (IFRSs as adopted by the EU);
• for the parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the parent Company financial statements;
• assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors' report, Directors' Remuneration report and Corporate governance statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Balfour Beatty plc's Legal Entity Identifier is CT4UIJ3TUKGYYHMENQ17.
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