Introduction

In managing the affairs of The Crown Estate, the Board of Commissioners (“the Board”) is committed to business integrity, high ethical values and professionalism across all its activities – all in accordance with the organisation’s core values of commercialism, integrity and stewardship. As an essential part of this commitment, the Board recognises the importance of high standards of governance and has in place a corporate framework document setting out the basis on which The Crown Estate operates and the formal structure for decision-making.

The Combined Code on Corporate Governance (the Combined Code) issued by the Financial Reporting Council is widely acknowledged as representing best practice in governance. Although The Crown Estate is not obliged to comply with the requirements of the Combined Code, its Board nevertheless supports the principles and provisions set out in the code and, inasmuch as they are applicable to the circumstances of The Crown Estate, seeks to comply with the code where this is appropriate.

This report describes the Board’s approach towards governance of The Crown Estate and, to the extent possible, how The Crown Estate has applied the principles set out in the Combined Code. Adherence to best practice in corporate governance is kept under regular review.

Composition of the Board

At 31 March 2006 the Board comprised eight members: a Chairman (who is non-executive), Chief Executive and six non-executive members. The composition of the Board is defined by the Crown Estate Act 1961.

The Board is satisfied that no individual, or group of individuals, is or has been in a position to dominate the Board’s decision-making. It is of the view that collectively Board members provide an appropriate balance of skills, experience and qualities and that, as currently constituted, the Board has strong independent and diverse characteristics.

Brief biographies of each of the current members are set out under the Board.

The role of the Board

The role of the Board is to maintain and enhance the value of The Crown Estate and the return obtained from it, having due regard to the requirements of good management. To achieve this, the Board’s responsibilities include:

• setting objectives, policies and strategies;
• monitoring long-term development of the organisation in the light of the political, economic and social environments in which it operates;
• controlling and monitoring the financial state and performance of The Crown Estate;
• approving major expenditure and transactions including acquisitions, disposals and joint ventures;
• ensuring a system of controls (financial and otherwise) is in place; and
• ensuring adequate succession and remuneration arrangements are in place.

The Crown Estate is a statutory corporation – further details about The Crown Estate’s constitution are set out in the foreword to the financial statements.

Delegated authorities

The Board has a formal schedule of matters reserved for its decision which include:

• approving the annual report and accounts;
• approving the annual budget and strategic plan;
• agreeing capital expenditure or disposals over £20 million;
• agreeing investment strategy; and
• granting or varying authority levels for Board committees and the Chief Executive.

Certain matters are delegated to committees of the Board and these are described in the terms of reference of the committees in question. The terms of reference of the audit committee, corporate responsibility committee and remuneration committee are summarised later in this report. Other issues are delegated to executive committees which include the management board (including investment and strategy matters), stock selection committee and communications group.

Subject to these matters, the Board delegates authority for the management of The Crown Estate’s business to the relevant directors and heads of department. The senior management team is responsible for the delivery of financial and qualitative targets and objectives as agreed annually as part of the business planning process. A formal set of financial delegations is in place for both revenue and capital expenditure.

The management board consists of:

Roger Bright, Chief Executive

Christopher Bourchier, Director of Rural Estate

Giles Clarke, Director of Investment Strategy & Asset Management

John Ford, Head of Change Programme & Internal Audit

Martin Gravestock, Director of Corporate Operations

David Harris, Head of Legal

John Lelliott, Director of Finance & IS

Rob Hastings, Director of Marine Estate (appointment commenced 1 February 2006)

Frank Parrish, Director of Marine Estate (retired 31 January 2006)

Elspeth Miller, Head of Customer Management (appointment concluded 2 March 2006)

The Chairman of the Main Board – Ian Grant – is responsible for chairing the Board and overseeing the official business of The Crown Estate. His duties include managing the business of the Board, ensuring its effective operation, keeping under review the general progress and long-term development of The Crown Estate, representing The Crown Estate to its various stakeholders and the general public, chairing the selection panel for the appointment of Board members, and undertaking the annual appraisal of non-executive Board members.

The Chief Executive – Roger Bright – is responsible for directing and promoting the profitable operation and enhancement of The Crown Estate. His duties include responsibility for the development of The Crown Estate and its effective operation, strategic planning, ensuring implementation of objectives, policies and strategies approved by the Board, including corporate responsibility targets and objectives, being responsible for public relations and acting as HM Treasury’s appointed Accounting Officer for The Crown Estate. Further details of the responsibility of the Accounting Officer are given in the foreword to the financial statements.

The non-executive members

The non-executive members are Sir Donald Curry, Hugh Duberly, Jenefer Greenwood, Martin Moore, Dinah Nichols and Ronald Spinney. The Board considers each of them to be independent non-executive members, bringing an objective viewpoint and none of the factors implying a lack of independence set out in the Combined Code applies. None of the non-executive members has (to his or her knowledge) any conflict of interest which has not been disclosed to the Board.

The Board considers annually the commitments of the non-executives and is satisfied that each of the non-executive members commits sufficient time to the fulfilment of his or her duties as a Crown Estate Commissioner.

There is currently no senior independent director on the Board. The creation of such a role is considered to be less appropriate to the circumstances of The Crown Estate where shareholders interests are not a factor.

Each of the non-executive Board members has a formal letter of appointment.

The Board secretary is Martin Gravestock, Director of Corporate Operations. In addition to other executive duties, the Board secretary’s responsibilities include supporting and advising the Chairman, ensuring that all Board procedures are followed, ensuring good information flow to Board members, acting as secretary to the selection panel for new Board appointments, and facilitating the induction of new Board members upon appointment. All Board members, including the non-executives, have access to the advice and services of the Board secretary.

Appointments process

Board members are formally appointed as Crown Estate Commissioners and are selected in accordance with the Government's general principles for public appointments. The appointment process is compliant with the principles set down in the Nolan Committee’s report on Standards in Public Life. In practice, initial appointments are made for a period of four years with a further potential renewal for a second period of four years. There is a presumption against further renewal but in any event a maximum 10 year appointment period applies.

The Crown Estate is required to operate to the highest standards of prudence, probity and professional competence. Board members are selected to provide collectively an appropriate balance of skills, experience and qualities, and minimal conflicts of interest with their outside activities. The potential pool is therefore relatively small, but all new appointments are publicly advertised and wide soundings with relevant outside bodies (including the Public Appointments Unit) are undertaken before a short list is drawn up.

The selection panel (comprising a representative from HM Treasury, an independent member agreed with HM Treasury and up to two existing Board members including the Chairman) supervises the process, interviews candidates against the detailed written requirements of the post and agrees its recommendation. The Chairman makes recommendations for reappointments with a presumption against second extensions. Appointments are made by Her Majesty The Queen on the advice of the Prime Minister. Special arrangements apply for appointments to the role of Chairman or Chief Executive, within the Government’s principles.

Current terms of office

*Formerly a non-executive Board member.

**Reappointment made since 31 March 2006.

Two reappointments were made during the year to 31 March 2006.

Succession planning

Board members’ appointments and reappointments are staggered to allow the managed transition of the Board’s business as non-executive Board members become ineligible for reappointment.

Board practice

Board meetings

The Board held eight scheduled meetings of the Main Board during the year ending 31 March 2006, plus one ad-hoc special meeting. As well as meetings in London, the Board also met in Windsor and Edinburgh. In addition there were three meetings of the audit committee, six meetings of the corporate responsibility committee, and two meetings of the remuneration committee.

In addition to scheduled Board meetings, each year the Board attends a special meeting which takes place over two days at which Broad strategy, external factors and the direction of the business is discussed in depth. This year’s event was held in Edinburgh.

Information flow

Board members receive a regular and controlled flow of information relevant to the fulfilment of their duties. For example, details of portfolio valuations and performance against external benchmarks, financial information particularly directed at revenue performance, and various market and research information and presentations.

Board papers encompass regular reports from the Chief Executive, Director of Finance and Information Systems and others on a planned basis. Formal minutes of all Board meetings are circulated to Board members. Between Board meetings other information is circulated as necessary to keep Board members informed on relevant issues, and outside of formal meetings the Board may be asked to make decisions “out of committee”. Board members have access to up-to-date corporate and market information as required.

Board processes

All key procedures and policies affecting the Board are maintained and operated by the Board secretary.

Liability

Board members are indemnified against any personal civil liability which is incurred in proper execution of their Board functions provided that the Board member has acted honestly, reasonably, in good faith and without negligence.

Board effectiveness

Board performance evaluation

During the last financial year, the Chairman carried out an annual appraisal with each of the non-executive Board members. These evaluations were conducted against the background of a comprehensive check list which ensured that there was opportunity to gain assurances or comments in respect of areas which required action. The evaluation included the perspective of the non-executive Board member (covering the view from his/her position and from the Board), and the Chairman’s assessment points.

Induction

All new Board members receive a full, formal and tailored induction on joining the Board. The process is overseen by the Board secretary. This involves the provision of necessary background information, briefing by key management personnel and implementing training where appropriate.

Board committees

The Board has established a number of both non-executive and executive committees and ensures that each committee is provided with sufficient resources to enable it to undertake its duties.

A summary of the role and terms of reference of the three Board committees (audit, corporate responsibility, and remuneration) is given below. The terms of reference of these committees are available on request.

In addition to these three Board committees, three other executive committees operate with specific authority delegated by the Board. First, the management board is chaired by the Chief Executive and comprises directors and heads of department. The management board considers strategic issues, significant organisational policies and reviewing investment strategy, and operates within the financial delegation of the Chief Executive. In reviewing investment strategy, the committee considers economic and property market analyses and forecasts, the overall weightings of the portfolio and the movements necessary to optimise performance. The stock selection committee considers, amongst other things, specific investment and divestment proposals, reviewing them against strategy. The third executive committee is the public relations committee whose duties include considering questions of PR policy and reviews and recommends an annual strategy and programme of PR activities.

A remuneration committee was established during the year. A separate report on the remuneration committee can be found in the Remuneration report.

There is no nominations committee as the appointment of Board members is conducted in line with principles approved by the Government for public appointments.

Audit committee

Members

The current members of the committee are:

Ronald Spinney (Chairman)

Sir Donald Curry, non-executive Board member

Martin Moore, non-executive Board member

The secretary to the audit committee is Martin Gravestock, Director of Corporate Operations.

Terms of reference

The Board has delegated responsibility for risk management, internal control, internal and external audit to the committee.

Specific duties include:

• reviewing the annual financial statements;
• considering the external audit appointment, the audit fee and the nature and scope of the external audit;
• reviewing reports from the external auditor;
• reviewing the risk management process;
• setting internal control policies and receiving regular reports on the effectiveness of internal control; and
• reviewing annually the scope, authority and resources of internal audit.

The following executives ordinarily attend meetings: the Chief Executive, the Director of Investment and Asset Management, the Director of Finance and Information Systems and the Head of Internal Audit.

The committee is authorised by the Board to investigate any activity or occurrence and to seek any information that it requires, including from employees.

“Whistleblowing”

A “whistleblowing” policy is in place within the organisation. If any employee believes that they are required to act in a way which:

• is illegal, improper, or unethical;
• is in breach of a professional code;
• may involve possible maladministration, fraud or misuse of public funds, or;
• is otherwise inconsistent with the internal code,

they should either raise the matter through their management line or else approach in confidence the Head of Internal Audit who has been entrusted with the duty of investigating employee concerns about illegal, improper or unethical behaviour. Employees should also draw attention to cases where:

• they believe there is evidence of irregular or improper behaviour elsewhere in the organisation, but where they have not been formally involved;
• there is evidence of criminal or unlawful activity by others, or;
• they are required to act in a way which, for them, raises a fundamental issue of conscience.

This policy has been reviewed to bring it into line with current public and private sector standards.

The Comptroller and Auditor General

The National Audit Office (NAO) acts as The Crown Estate’s external auditors. The appropriate NAO Director attends meetings of the audit committee and they enjoy complete access to all financial and other information. The Chairman of the audit committee meets privately with the relevant NAO Director once a year to receive assurances on the audit processes undertaken and to hear of any issues of concern.

Report of the committee’s activities

During the year, the committee met three times (on each occasion with the external auditor in attendance) and considered all matters within the committee’s terms of reference, in particular:

• external audit strategy and report;
• internal audit charter, scope and authority, programme and report;
• risk management;
• health and safety;
• annual and interim accounts and accounting policy;
• valuation;
• litigation;
• retrospective investment appraisals; and
• pension scheme.

Corporate responsibility committee

Members

The current members are:

Roger Bright (Committee Chairman)

Dinah Nichols, non-executive Board member

Martin Gravestock, Director of Corporate Operations

The secretary to the committee is Tim Riley, a corporate support executive.

Meetings are held at least quarterly. All meetings are attended by the Head of Corporate Support. The committee reports to the Main Board particularly in relation to relevant policy statements or decisions and the achievements against objectives and targets.

Terms of reference

The committee's main purpose is to ensure that there is in place an established framework for improving the management of the historic, environmental and social aspects of the business of The Crown Estate and that the organisation's reputation as a responsible landowner continues to be enhanced. The duties of the committee include:

• formulating policy and strategy in relation to corporate responsibility for approval by the Board;
• ensuring implementation of corporate responsibility and environmental policies;
• overseeing production of the annual corporate responsibility report; and
• providing representation for The Crown Estate at external events relating to corporate responsibility.

Report of the committee’s activities

During the year, the committee met six times and considered all matters within the committee’s terms of reference, in particular:

• setting CR objectives and targets;
• monitoring performance;
• training and awareness;
• benchmarking;
• policy statements; and
• external consultancy and audit advice.

The work of the committee is reflected in the corporate responsibility report which is published annually.

Attendance at Board and committee meetings

Attendance by individual members at Board, audit and corporate responsibility committee meetings, which they were eligible to attend, was as follows:

*There were eight scheduled Board meetings, plus one “ad hoc” special meeting.

In addition Board members have taken part in formal visits to estates at Bingham, Devizes, Fochabers, Taunton, Stapleford Abbotts, and Yorkshire and Wash estates. In addition a number of visits were made to parts of the London and marine estates, including coastal areas of Scotland, as well as attendance at a number of ad hoc seminars and events.

Internal control

A statement on the system of internal control including the risk framework, policy and processes is provided in the foreword to the financial statements.

Ian Grant
Chairman

May 2006