national express group plc - pircpirc.co.uk/services-1/files/national express group 2015 agm...

NATIONAL EXPRESS GROUP PLCUK Governance Service

MEETING DATE Wed, 06 May 2015 14:00 pm TYPE AGM ISSUE DATE Wed, 22 Apr 2015

MEETING LOCATION Purcell Room at the Queen Elizabeth Hall, Southbank Centre,Belvedere Road, London SE1 8XX

CURRENT INDICES FTSE MidCap

SECTOR Travel & Tourism

COMPANY OVERVIEW

National Express Group is multinational transport provider, delivering services in the UK, North America, Germany, Spainand Morocco. The Group operates bus, coach, train and tram services.

MEETING SPECIFIC INFORMATIONQuorum requirements and voting majorityResolutions under extraordinary business have special voting majority requirements. Resolutions 19, 20 and 21 requirethree quarters of the votes validly cast in order to be approved.

PROPOSALS ADVICE

1 Receive the Annual ReportStrategic Report meets guidelines. Adequate environmental and employment policies are in placeand relevant, up-to-date, quantified environmental reporting is disclosed. Support is recommended.

For

2 Approve Remuneration PolicyRating: ADC.Disclosure is in line with best practice. While clear improvements have been made to the newremuneration policy, these are not considered sufficient to support the proposal. There are stillimportant concerns over the excessiveness of maximum potential award which can be granted to theCEO under all incentive plans. Also, certain features of the LTIP, such as the absence of non-financialmetrics or the use of independent performance measures, are not in line with best practice. Finally,there are concerns over the proposed recruitment and termination policy, under which the Committeeis granted an inappropriate level of upside discretion to determine payments to directors.

Oppose

3 Approve the Remuneration ReportRating: AB.Disclosure is good. Changes in CEO salary are considered approximately in line with the rest ofCompany and the CEO salary is approximately at median of comparator group. Changes in CEOpay over the last five years are considered in line with Company’s performance over the same period,which is welcomed. Also, CEO variable pay for the year under review is not considered excessiveas it represents less than 200% of his salary. No recruitment or termination payments were madeduring the year.

For

4 Approve the dividendA final dividend of 6.95p per share is proposed, which will bring the total dividend for the year underreview to 10.30p. Covered by earnings. Acceptable proposal.

For

5 To re-elect Sir John ArmittChairman. Independent upon appointment.

For

6 To elect Matthew AshleyNewly appointed Group Finance Director. Six months rolling contract.

For

7 To re-elect Joaquin AyusoIndependent Non-Executive Director. It is noted that he missed three Board meetings he was eligibleto attend, without justification provided. An abstain vote is therefore recommended.

Abstain

NATIONAL EXPRESS GROUP PLC 06 May 2015 AGM 1 of 21

8 To re-elect Jorge CosmenNon-Executive Deputy Chairman. Not considered independent as he is a former executive of AlsaGroup, now a subsidiary of the company, and due to his substantial shareholding interest in theCompany (approx 17.3% of the issued capital). He has also been on the Board for more than nineyears. However, there is sufficient independent representation on the Board and a vote in favour isrecommended.

For

9 To re-elect Dean FinchChief Executive Officer. Twelve months rolling contract.

For

10 To re-elect Jane KingstonIndependent Non-Executive Director.

For

11 To re-elect Chris MuntwylerIndependent Non-Executive Director. It is noted that he missed one audit committee meeting he waseligible to attend, without justification provided. An abstain vote is therefore recommended.

Abstain

12 To re-elect Elliot (Lee) SanderSenior Independent Director. Considered independent.

For

13 Re-appoint the auditors: Deloitte LLPNon-audit fees represent approximately 20% of audit fees during the year under review andapproximately 21% of audit fees over a three-year aggregate basis. This level of non-audit feesdoes not raise significant concerns. Also, the external auditor has changed during the last five yearswhich is considered best practice. A vote in favour is recommended.

For

14 Allow the board to determine the auditors remunerationStandard proposal.

For

15 Approve new long term incentive planShareholders are being asked to approve the National Express Group PLC 2015 Long Term IncentivePlan, which is a discretionary incentive plan and is intended to be operated for selected Directors ofthe Company and its subsidiaries. The maximum market value of shares over which Awards may begranted to a participant in any financial year will not exceed in aggregate 200% of annual base salary.This is considered excessive, especially when combined with the maximum potential award underthe annual bonus. Also, there is an exceptional limit, for recruitment purposes, of 400% of salary.The use of such limits is not considered appropriate as it does not align the new director pay withthe existing executives. While the introduction of a two-year holding period is welcomed, the threeyear performance period is not considered sufficiently long-term. Finally, the performance metricused, which are disclosed adequately with their respective targets, do not include any non-financialelements and do not operate interdependently.Rating: DB.

Oppose

16 Issue shares with pre-emption rightsThe authority is limited to one third of the share capital and another third in connection with a RightsIssue. This is in line with normal market practice and expires at the next AGM. All directors arestanding for annual re-election. Support is recommended.

For

17 Approve Political DonationsThe proposed authority is subject to an overall aggregate limit on political donations and expenditureof £100,000. The Company did not make any political donations or incur any political expenditureand has no intention either now or in the future of doing so. Within recommended limits.

For

18 Approve increase in Directors’ feesThe Board is seeking shareholders approval to increase Non-Executive Directors aggregate feelimit from to £725,000 per annum. The Board states that such increase is necessary ’in view ofthe increasing time commitment involved and the possibility of appointing additional Non-ExecutiveDirectors in the future, and in line with market trends.’Disclosure of the current NED fee limit would be welcomed. The current amount of fees paid to NEDrepresented £622,000. The proposed fee limit is not considered excessive compared to the currentaggregate fee paid to executive directors and would be necessary to increase fee level and appointnew directors, as suggested by the Company. A vote in favour is therefore recommended.

For

19* Issue shares for cashAuthority is limited to 5% of the Company’s issued share capital and will expire at the next AGM.Within acceptable limits.

For


20* Authorise Share RepurchaseAuthority is limited to 10% of the Company’s issued share capital and will expire at the next AGM.Within acceptable limits.

For

21* Meeting notification related proposalThe proposed resolution reflects the implementation of the EU Shareholder Rights Directive intoEnglish law, which took place on 3 August 2009 as implemented by the company in its Articles ofAssociation. Under the regulations, the minimum notice period for general meetings (other thanAnnual General Meetings) will increase to 21 days unless shareholders agree on a shorter noticeperiod, in which case it may be 14 days. Shareholder approval is sought to call general meetings on14 clear days notice.All companies should aim to provide at least 20 working days notice for general meetings in orderto give shareholders sufficient time to consider what are often complex issues. However, as theproposed change is permissible by the Companies Act, support is recommended.

For

22 Shareholder Resolution: conduct an independent review of North American school busoperationsThis resolution has been put forward by a group of shareholders including local authority pensionfunds and individuals representing the US International Brotherhood of Teamsters. The proponentsbelieve that shareholder interests are being put at risk due to the continuing acrimonious relationswithin the company between local management and the company’s Durham School Servicesemployees in the US. Shareholder concern was previously expressed at the 2014 AGM, wherenearly 20% of independent shareholders voted to support or abstain on a proposal seeking greaterboard oversight of employment rights issues in its North American school bus operations. Theproposal calls on National Express to conduct an independent review of its North American schoolbus operations to address continuing reports coming from the Company’s Durham School Servicesemployees claiming management interference with their freedom of association rights. The proposalcalls on the Company to obtain an independent assessment of these allegations through theappointment of a suitable person to review the situation. This person would report their findingsto the Company and unions and provide their report for shareowners on the Company’s website bythe end of Q3 2015. This person should be acceptable to both the Company and the unions.The Board is recommending shareholders vote against this resolution. It states that the facts(safety indicators, employee pay, employee surveys), which are available publicly, demonstrate thatthe accusations are not an accurate description of business practices. The Board considers thatthe accusations do not reflect the business the Board sees on its visits to North America or theconversations it has with customers and employees.While the Board’s position is understandable, it is believed that an independent review of the USoperation is a reasonable request, in light of the significant negative publicity generated by this issue.As stated by the shareholders, this would certainly mitigate the risk of both reputational damage andimpact on shareholder value resulting from continuing disputes. Such a review would also provide adefinitive answer to this allegation and allow other shareholders to assess the evidence on this issue.We recommend support for the resolution.

For

* = Special resolution

SUPPORTING INFORMATION FOR RESOLUTIONS

Proposal 22 - Shareholder Resolution: conduct an independent review of North American school bus operationsNB: Disclosure:PIRC has been consulted on the terms of this resolution and the aforementioned local authority pension fundrequisitionists are clients.

COMPANY ENGAGEMENT

A draft copy of the report for this meeting was provided to the Company for comments.


PREVIOUS AGM’S RECOMMENDATIONS & VOTING RESULTS - Wed, 14 May 2014

RESOLUTION PROPOSAL PIRC VOTE % OPPOSE % ABSTAIN

1 Receive the Annual Report Oppose 0.81 2.31

2 Approve Remuneration Policy Oppose 10.2 11.29

3 Approve the Remuneration Report For 35.51 1.24

4 Approve the dividend For 0.01 0.07

5 To re-elect Sir John Armitt For 0.14 0.08

6 To re-elect Joaquín Ayuso For 0.27 0.08

7 To re-elect Jorge Cosmen For 1.47 0.08

8 To re-elect Dean Finch For 0.14 0.08

9 To re-elect Sir Andrew Foster For 10.15 0.08

10 To re-elect Jackie Hunt For 4.9 0.27

11 To elect Jane Kingston For 0.03 0.09

12 To re-elect Jez Maiden For 0.12 0.09

13 To re-elect Chris Muntwyler For 0.38 0.09

14 To re-elect Elliot (Lee) Sander For 3.08 0.08

15 Appoint the auditors For 0.03 0.07

16 Allow the board to determine the auditors remuneration For 0.04 0.08

17 Issue shares with pre-emption rights For 1.29 0.08

18 Approve Political Donations For 2.42 0.08

19 Issue shares for cash For 0.12 0.08

20 Authorise Share Repurchase For 0.93 0.08

21 Meeting notification related proposal For 4.09 0.07

22 Shareholder Resolution: That the Board should takesteps to develop a robust and transparent oversightfor the company’s corporate responsibility strategy andpolicies

For 85.36 2.07

Note: % Oppose is the combined vote results for oppose/withhold.


CORPORATE GOVERNANCE HIGHLIGHTS

BOARD AND OTHER GOVERNANCE INFORMATION AS OF MAY 2015

Size of Board 8

Average Age of Directors 55

Average Tenure of Directors 3.13

Number of Independent Directors 4

Board Independence Level 57.14%

Directors Aggregated Voting Rights 17.46%

Annual Election of Directors Yes

Separate Chairman and CEO Yes

The Senior Independent Director is independent Yes

The CEO and/or Chairman is on the Remuneration Committee No

The CEO and/or Chairman is on the Nomination Committee Yes

Audit Committee is Fully Independent Yes

The Company Maintains a Corporate Jet n/d

Number of Resolutions with a Significant Proportion of Votes Against (10%) 3


BOARD AND COMMITTEE COMPOSITION

BOARD CHANGES

Sir Andrew Foster and Jackie Hunt will both retire from the board at the forthcoming AGM. Jez Maiden left theboard on 31 December 2014. Matthew Ashley was appointed to the board on 28 January 2015.

DIRECTORS NAME GENDER PIRC COMPANY BOARD AC RC NC TENURE

Sir John Armitt M Yes Yes Ch - - Y* 2

Jorge Cosmen M No No VCh - - Y 9

Dean Finch M No No CEO - - - 5

Matthew Ashley M No No Exec - - - <1

Elliot (Lee) Sander M Yes Yes SID - Y - 2

Joaquin Ayuso M Yes Yes NED - - Y 3

Jane Kingston F Yes Yes NED - Y - 1

Chris Muntwyler M Yes Yes NED Y - - 3

Number of Meetings 8 4 2 3

Number of NED only Meetings n/d

ANALYSIS: BOARD AND COMMITTEE COMPOSITION

After the AGM, there will be only one female director on the Board, which represents 12.5% of the total Board. Such lowlevel of female representation is not in line with Lord Davies recommendation for FTSE350 companies to have at least25% of women on Board by 2015. However, National Express has set the target that, by the end of 2015, 30% of theBoard will be women. We hope that the Company will keep and achieve that target.

There should be a clear division of responsibilities at the head of the company between the running of the Board and theexecutive responsibility for the running of the company’s business. No one individual should have unfettered powers ofdecision. There is a clear and robust separation of powers at the head of the company.

There is an adequate balance between executives and non executives on the Board. The majority of the Board, excludingthe chairman, is independent by PIRC guidelines.

The composition of the Nomination Committee does not meet PIRC guidelines as the Chairman also chairs thecommittee, which we do not support in light of Higgs’ view on the independence of a Chairperson.

Following the stepping down of Sir Andrew Foster and Jackie Hunt at the AGM, the Company states that thecomposition of our Board Committees will, for a short period, not be in line with the UK Corporate Governance Code. Italso stated that such non-compliance is well recognised by the Company and will be rectified following the appointmentsof two independent Non-Executive Directors.

BOARD AND COMMITTEE COMPOSITION CONCERNS

1. The nomination committee does not comply with PIRC guidelines.

BOARD OF DIRECTORS

PIRC assesses a non-executive director’s independence according to PIRC’s shareholder guidelines. Commentsrepresent PIRC’s analysis based on information in the report and accounts. AC = Audit Committee, RC = RemunerationCommittee, NC = Nomination Committee, C = Corporate Responsibility or Ethics Committee, * = Committee Chairman.


SIR JOHN ARMITT CHAIRMAN

AGE 69 TENURE 2 Years COMMITTEES N*VOTING RIGHTS <1% OPTIONS 0 LTIP 0

OTHER POSITION Berkeley Group Holdings PLC [DCh]; City and Guilds [Ch]; Transport for London [Dir];ex-Costain [CEO]; ex-Engineering and Physical Science Research Council [Ch]; ex-LaingInternational and Civil Engineering Divisions [Ch]; ex-Network Rail and Railtrack [CEO];ex-Olympic Delivery Authority [Ch]; ex-Union Railways [CEO]

INDEPENDENT BY PIRC Y INDEPENDENT BY COMPANY Y

COMMENT Independent upon appointment.

JORGE COSMEN VICE CHAIRMAN (NON EXECUTIVE)

AGE 46 TENURE 9 Years COMMITTEES NVOTING RIGHTS 17.38 % OPTIONS 0 LTIP 0

OTHER POSITION Bankia [NED]; ex-Alsa Group [Ch]

INDEPENDENT BY PIRC N INDEPENDENT BY COMPANY N

COMMENT Deputy Chairman. Not independent by the company, not independent by PIRC as he is aformer executive of Alsa Group, now a subsidiary of the company, and due to his substantialshareholding. Mr Cosman’s holding includes shares held by European Express EnterprisesLtd.

DEAN FINCH CHIEF EXECUTIVE

AGE 48 TENURE 5 Years COMMITTEES NoneVOTING RIGHTS <1% OPTIONS 0 LTIP 319,967

OTHER POSITION Royal Free London NHS Foundation Trust [NED]; ex-First Group plc [Group FD, GroupCOO]; ex-KPMG [Corporate Transaction Support Services]; ex-Tube Lines [Group CE]


SEVERANCE 12 months rollingCOMMENT Chief Executive.

MATTHEW ASHLEY EXECUTIVE DIRECTOR

AGE 41 TENURE <1 Years COMMITTEES NoneOTHER POSITION ex-Deloitte [Dir]


SEVERANCE 6 months rollingCOMMENT Group Finance Director.

ELLIOT (LEE) SANDER SENIOR INDEPENDENT DIRECTOR

AGE 58 TENURE 2 Years COMMITTEES ROTHER POSITION HAKS Group Inc [Pres, CE]; Regional Plan Association [Ch]; ex-National Surface

Transportation Infrastructure Finance Commission; ex-New York City Department ofTransportation [Commissioner]; ex-New York Metropolitan Transportation Authority [CE]

INDEPENDENT BY PIRC Y INDEPENDENT BY COMPANY Y

COMMENT Independent by company, independent by PIRC. He will be appointed Senior IndependentDirector following the 2015 AGM.


JOAQUIN AYUSO NON-EXECUTIVE DIRECTOR

AGE 59 TENURE 3 Years COMMITTEES NOTHER POSITION AT Kearney [Snr Adv]; Autopista del Sol SA [Dir]; Bankia [NED]; Ferrovial [VCh]; Hispania

Activos Inmobiliarios SA [Dir]INDEPENDENT BY PIRC Y INDEPENDENT BY COMPANY Y

COMMENT Independent by company, independent by PIRC.

JANE KINGSTON NON-EXECUTIVE DIRECTOR

AGE 57 TENURE 1 Year COMMITTEES ROTHER POSITION Compass Group PLC [Dir]; ex-BPB PLC [Dir]; ex-Blue Circle Industries PLC; ex-Coats

Viyella PLC; ex-Enodis PLCINDEPENDENT BY PIRC Y INDEPENDENT BY COMPANY Y


CHRIS MUNTWYLER NON-EXECUTIVE DIRECTOR

AGE 62 TENURE 3 Years COMMITTEES AOTHER POSITION Austrian Post Ltd [NED]; Conlogic Ltd [CE, Ch]; Panalpina World Transport (Holding) Ltd

[NED]; ex-DHL Express (UK) Ltd [CE]; ex-DHL [MD]; ex-SwissairINDEPENDENT BY PIRC Y INDEPENDENT BY COMPANY Y


BOARD COMPOSITION

BOARD COMPOSITION FOLLOWING THE AGM

CURRENT YEAR FTSE MIDCAP MEAN

Number % of Board Number % of Board

Executive Director 2 25.0 2.2 28.0Independent NED’s 4 50.0 4.0 50.1Connected NED’s 1 12.5 0.8 10.8Other 1 12.5 0.8 10.8

BOARD COMMITTEES FOLLOWING THE AGMCURRENT YEAR FTSE MIDCAP MEAN

Number of % Independent % Independent by Number of % IndependentMembers by PIRC Company Members by PIRC

Whole Board 8 50.0 62.5 7.8 51.4Audit 1 100.0 100.0 3.5 89.2Remuneration 2 100.0 100.0 3.8 88.2Nomination 3 33.33 66.67 4.4 75.6

WORK FORCE GENDER BALANCE

NUMBER PERCENTAGE

Female Board Members 1 12.5Female Senior Management 14 22.95Female Work Force 17853 42.25


REMUNERATION

NON-EXECUTIVE DIRECTORS FEES - GBP

2014 % CHANGE 2013 % CHANGE 2012

Fees 622,000 -1.27 630,000 6.06 594,000Other 0 - 0 - 0Total 622,000 -1.27 630,000 6.06 594,000

EXECUTIVE REMUNERATION BREAKDOWN - GBP

2014 % CHANGE 2013 % CHANGE 2012

Cash Payments

Salary 989,000 1.96 970,000 0.0 970,000Annual Bonus Cash 1,372,000 -1.29 1,390,000 22.47 1,135,000Other Bonus 0 - 0 - 0Benefits 52,000 1.96 51,000 2.0 50,000Dividends on LTIPs 0 - 0 - 0Total 2,413,000 0.08 2,411,000 11.88 2,155,000

Pension Payments

Defined Benefit 0 - 0 - 0Defined Contribution 0 - 0 - 0Pension Other 303,000 2.02 297,000 0.0 297,000Pension Total 303,000 2.02 297,000 0.0 297,000

Share Incentives

Options Awarded 0 - 0 - 0Options Rewarded 0 - 0 - 0LTIP Awarded 2,791,000 2.72 2,717,000 27.71 2,127,461LTIP Rewarded 0 - 0 -100.0 516,000Total Share Incentives Awarded 2,791,000 2.72 2,717,000 27.71 2,127,461Total Share Incentives Rewarded 0 - 0 -100.0 516,000

CEO REMUNERATION BREAKDOWN - GBP

2014 % CHANGE 2013 % CHANGE 2012

Cash Payments

Salary 561,000 2.0 550,000 0.0 550,000Annual Bonus Cash 778,000 -0.89 785,000 21.89 644,000Other Bonus 0 - 0 - 0Benefits 27,000 3.85 26,000 0.0 26,000Dividends on LTIPs 0 - 0 - 0Total 1,366,000 0.37 1,361,000 11.56 1,220,000

Pension Payments

Defined Benefit 0 - 0 - 0Defined Contribution 0 - 0 - 0Pension Other 196,000 2.08 192,000 0.0 192,000Pension Total 196,000 2.08 192,000 0.0 192,000

Share Incentives

Options Awarded 0 - 0 - 0Options Rewarded 0 - 0 - 0LTIP Awarded 1,830,000 3.1 1,775,000 1.07 1,756,292LTIP Rewarded 0 - 0 -100.0 289,000Total Share Incentives Awarded 1,830,000 3.1 1,775,000 1.07 1,756,292Total Share Incentives Rewarded 0 - 0 -100.0 289,000


REMUNERATION SUMMARY

TOTAL EXECUTIVE REMUNERATION - GBP

2014 % CHANGE 2013 % CHANGE 2012

Awarded 5,507,000 1.51 5,425,000 18.46 4,579,461Rewarded 2,716,000 0.3 2,708,000 -8.76 2,968,000

TOTAL CEO REMUNERATION - GBP

2014 % CHANGE 2013 % CHANGE 2012

CEO Dean Finch Finch Dean FinchAwarded 3,392,000 1.92 3,328,000 5.04 3,168,292Rewarded 1,562,000 0.58 1,553,000 -8.7 1,701,000

CEO VS. AVERAGE EMPLOYEE

2014 % CHANGE 2013 % CHANGE 2012

CEO Salary 561,000 550,000 550,000CEO Total Cash 1,366,000 1,361,000 1,220,000Average Employee Pay 17,497 0.14 17,471 5.35 16,584

Ratio 78:1 78:1 74:1

COMPARATIVE SALARY RANKING

Highest Paid Director: 8 out of 22.Comparator Used: Travel & Leisure sector - FTSE 250

FIXED REMUNERATION

Description

Maximum Pension contribution: Maximum Benefit:35% of salary. No Maximum limit.

Additional Information:Executive Directors are provided a cash allowance in lieu of a pension provision. The Group CEOreceives a cash supplement in lieu of pension at 35% of salary. The Group FD receives a pensioncontribution or a cash supplement in lieu of pension at 25% of salary.Executive Directors receive family private healthcare, death in service and life assurance cover (4x base salary), long term sickness and disability insurance, a cash alternative to a fully expensedcar, free travel on the Company’s services and professional membership subscriptions.

Policy

Pay elsewhere in the Company is used in determining directors pay. However, the Companydid not consult directly with employees on this matter. There is no maximum limit clearly statedfor Executive benefits. Pension contributions are capped at 35% of salary, which is consideredexcessive.

Implementation

All elements of the Single Total Remuneration Table are adequately disclosed. Next year’s feesand salaries have been adequately stated.Changes in CEO salary are considered approximately in line with the rest of Company. CEOsalary is just above median of comparator group, which does not raise significant concerns.


VARIABLE REMUNERATION

Performance Related Bonus

Maximum Award: Rewarded during the year:

Description 200% of base salary. 138.75% of salary.

Additional Information:A proportion of the bonus payments is subject to mandatory deferral into shares for one year fromaward as follows: 25% of the bonus earned up to 125% of salary; 50% of the bonus earned from125% to 150% of salary; and 75% of the bonus earned above 150% of salary (applicable to GroupCEO only). Dividends or dividend equivalents are paid on these shares.The targets for the bonus in respect of 2015 are as follows: 75% bonus is subject to normalisedprofit and free cashflow targets; 25% is subject to non-financial targets. The annual bonuscontains malus and clawback provisions.

2015 Long Term Incentive Plan (LTIP) – Performance Shares

Maximum Potential Award: Vested during the year:

Description From 2015:200% of salary for the CEO;150% of salary for the Finance Director.

0%.

Additional Information:Award with a face value of 320% of salary was made to the CEO during the year. This is withinthe former long-term incentives policy limits.From 2015, Performance Share Awards are granted annually and vesting is dependent on theachievement of performance conditions measured over a three-year period. An additional twoyear holding period has been introduced to increase alignment with shareholders. Dividendequivalents can be paid on these shares. Malus and clawback provisions are attached to awardsmade under the LTIP which apply over a two year period post vesting. For 2015, the Awards willbe based equally as follows: • 1/3 Earnings Per Share • 1/3 Return On Capital Employed • 1/3Total Shareholder return (split between 50% FTSE 250 comparator group and 50% competitors).

Policy The simplification of the long-term arrangements under the new policy is welcomed, so is theintroduction of a mandatory holding period vesting. However, best practice would have been touse non-financial KPI as performance metric and also to have performance conditions operatinginterdependently. A longer performance period would also be welcomed.The use of a deferral period for the Annual Bonus is welcomed but is not considered to besufficiently challenging. In fact best practice is to defer at least 50% of any annual bonus earned.

Implementation Performance conditions and targets for the Annual Bonus and LTIP are adequately disclosed. Allshare incentive awards are fully disclosed with award dates and prices. Dividend equivalents arehowever not separately categorized, which is not best practice.


CONTRACTS

Max. Notice period by the Company: Max. Notice period by the Executive:

Description 12 months 12 months.

Additional Information:The Committee’s policy is for all Executive Directors to have rolling service contracts with anotice period of 12 months, unless on an exceptional basis to complete an external recruitmentsuccessfully, when a longer initial period reducing to 12 months may be used. General policyis that termination payments, if applicable, do not go beyond 12 months’ salary and benefits.The service contract of Dean Finch, which is a rolling contract, contains a provision, exercisableat the option of the Company, to pay an amount on termination of employment equal to oneyear’s salary, salary supplement in lieu of pension and car allowance. For unvested LTIP awards,awards will normally be reduced time pro rata to reflect time elapsed between grant and cessationof employment. However, report the Committee has the discretion to allow full vesting.

Policy

The possibility to grant a longer notice period on recruitment is not considered appropriate. . Also,there is an exceptional limit of 400% of salary under the LTIP for recruitment purposes. The useof such limit raises concerns over potential excessive recruitment payments.On termination, the upside discretion given to the Board no to pro-rate outstanding share awardsunder the LTIP raises concerns.

Implementation No recruitment or termination payments were made during the year.

BEST PRACTICE PRINCIPLES: REMUNERATION REPORT

BEST PRACTICE PRINCIPLE AND CRITERIA: IMPLEMENTATION ANALYSIS

A. Fixed Remuneration1. All elements of the Single Total Remuneration Table are adequately disclosed? Yes2. Increase in CEO salary is in line with the rest of the Company? Yes3. The highest paid director/CEO’s salary is below upper quartile in PIRC’s comparator group? No4. The highest paid director/CEO’s salary is below lower quartile in PIRC’s comparator group? Yes5. Are Next year’s fees and salaries clearly stated? YesB. Variable Pay6. Future performance conditions and past targets for annual bonuses paid are stated? Yes7. Performance conditions and targets for long term incentives are disclosed? Yes8. All share incentive awards are fully disclosed with award dates and prices? Yes9. Is dividend accrual applied and separately categorised? No10. Vesting scale for long term incentive is clear? YesC. Excessiveness and other remuneration practices11. Acceptable balance of CEO pay with financial performance? Yes12. Awards made under all schemes during the year are not excessive? No13. Total realised rewards under all incentive schemes were not excessive? Yes14. Acceptable ratio of CEO pay compared to average employee pay? No15. Has discretion been applied, if yes, has it been appropriately applied? n/a16. Changes in practice are fully explained and appropriate? YesD. Contract17. Appropriate compensation and/or loss of office payments were made during the year? n/a18. Appropriate recruitment awards were made during the year under review? n/a

IMPLEMENTATION RATING: AB


BEST PRACTICE PRINCIPLES: POLICY REPORT

BEST PRACTICE PRINCIPLE AND CRITERIA: POLICY ANALYSIS

A. Fixed Remuneration1. Pay elsewhere in the Company is used in determining directors pay? Yes2. Company consults employees when setting executive pay? No3. There is information on the composition of NEDs’ remuneration and how it is determined? YesB. Variable Pay4. Maximum potential awards under annual bonuses are stated? Yes5. Maximum potential awards for long term incentive schemes disclosed? Yes6. Does clawback operate on the bonus? Yes7. Does clawback operate on the LTIP? Yes8. Performance period for the LTIP is 5 years or more? No9. If performance period is 4 years or less there is an additional holding period applied? Yes10. Are executive share schemes’ long term performance measures appropriately linked to non-financial

KPIs?No

C. Excessiveness and other remuneration practices11. Pay policy aims are fully explained in terms of the Company’s objectives? Yes12. Total potential awards under all incentive schemes are not excessive? No13. Schemes are available to enable all employees to benefit from business success without

subscription?No

14. Directors are required to build up an adequate shareholding? Yes15. The intended balance of the pay package is fully described? YesD. Contracts16. No pre-determined compensation in excess of one year? Yes17. Are termination provisions not excessive? No18. Mitigation statement has been made? Yes19. Duration of contracts and company liabilites on termination are given? Yes

PIRC POLICY RATING: ADC


AUDIT

Audit Firm Deloitte LLPDate Appointed 2011-01-01Tenure 4 YearsAudit Partner Nigel MercerPartner Appointed 1900-01-01

AUDITOR REMUNERATION - GBPm 2014 2013 2012Deloitte LLP Deloitte LLP Deloitte LLP

Statutory audit fee 1.0 0.9 0.9

Acceptable non-audit work undertaken by the auditors

Audit-related, mandatory regulatory 0.0 0.0 0.0Tax compliance 0.0 0.0 0.0Subtotal Authorised 0.0 0.0 0.0

Unacceptable non-audit work undertaken by the auditors

Other tax services 0.0 0.0 0.0Aquisition-related 0.0 0.0 0.0Other services 0.2 0.1 0.3Total non-audit fees 0.2 0.1 0.3

Company annual percentage of audit fees 20.0 11.11 33.33Total Company three year percentage of audit fees 21.0Index average percentage of audit fees 47.2Index three year average percentage of audit fees 50.7

ANALYSIS: AUDIT AND REPORTING

The external auditor has changed during the last five years which is considered best practice. PIRC believes there isa risk that over time an auditor’s familiarity with the audit client’s affairs may result in excessive trust. If the same firmcontinues to hold the position of auditor for many years, then previous judgements are not subject to outside scrutiny. Wedo not consider that rotation of the audit partner, within the same firm, is sufficient. We continue to maintain that rotationof the audit firm after a period of five years is best practice.

Non-audit fees represent approximately 20% of audit fees during the year under review and approximately 21% of auditfees over a three-year aggregate basis. This level of non-audit fees does not raise significant concerns.

AUDIT CONCERNS

1. The audit firm is not subject to fixed term rotation.2. The audit committee is either not fully independent or comprised of fewer than three members.3. Non-audit fees have not been broken down adequately.


FINANCIALS

2014 GBP 2013 GBP 2012 GBP

Year End 31 December 31 December 31 DecemberEarnings per share (p) 11.6 11.1 11.8Dividend per ordinary share (p) 10.3 10.0 9.75

SHARE CAPITAL AND SHAREHOLDER RELATIONSDISCLOSED ORDINARY VOTING RIGHTS

PERCENTAGE

European Express Enterprises Ltd 15.4Prudential PLC 11.8Jupiter Asset Management Ltd 5.1Schroders plc 5.2BlackRock Inc 5.0

CAPITAL STEWARDSHIP

Shareholder equity is the total of capital that has been invested in a company by its shareholders and the retained gainsof that company attributable to shareholders. Net assets given by a company’s financials statements balance with itsshareholder equity and reflect how the shareholder equity has been invested or lost by the company. A comparison ofa company’s net assets to its market capitalisation provides information on the market’s view of the company’s ability toprovide sufficient return on shareholder funds invested and to realise the values attributed to its assets.

Goodwill is written off when it becomes apparent that an acquisition is worth less than the company paid for it. A highlevel of goodwill written off by a company indicates a pattern of shareholder funds being lost through overpaying foracquisitions.

ISSUED AUTHORISED TREASURY SHARES CURRENCY

Number of Shares (m) 511.185 800 0.553268 GBP

Shareholder equity per share 1.61Share price at the year end 2.48Shareholder equity written off as goodwill 0.16Shareholder equity per share including goodwill written off 1.77Tangible shareholder equity per share -0.69

PERCENTAGE

Premium of share price to shareholder equity per share 54.19Premium of share price to shareholder equity per share inclusive of goodwill previously written off 40.25Premium of share price to shareholder equity per share less goodwill and intangibles -458.8Aquisition losses - goodwill written off as a proportion of share price 32.97

NET ASSETS GBP(m) GOODWILL AND INTANGIBLES GBP(m)

Total Gross Net Assets (Total Equity) 836.2 Other Intangible Assets 164.1Minority and Other Equity Interests 12.7 Goodwill Carried 1,013.3Shareholder Equity 823.5 Goodwill Written Off 81.9Tangible Shareholder Equity -353.9

ANALYSIS: CAPITAL STEWARDSHIP

The value of intangible assets, including goodwill, exceeds shareholder funds. The Group is therefore highly dependenton extracting the value from its intangible assets and goodwill. There was no impairment loss of goodwill recognisedin the year. However, accumulated goodwill impairment as at 31 December, 2014 was £81.9 million. At the year end,the shares were trading at a premium of 54.19% to the Company’s Net Assets, indicative of investors’ confidence in the


realisable value of the balance sheet assets or in the Company’s ability to achieve the market required rate of return onthese assets.

ANALYSIS: SHAREHOLDER RIGHTS

A final dividend of 6.95p per share is proposed, which will bring the total dividend for the year under review to 10.30p.Covered by earnings.

There is no controlling shareholder and no persons have the right to designate directors to the Board. However, it notedthat the deputy Chairman has connections with the Company’s biggest shareholder, European Express Enterprises Ltd,in which he has a significant interest.


STRATEGIC REVIEW

BEST PRACTICE PRINCIPLE AND CRITERIA: STRATEGIC REVIEW ANALYSIS

A. Overview1. The Company provides a fair review of its business Yes2. The Company reports on the principal risks and uncertainties it faces YesB. Business Model and Strategy3. The company provides a description of it’s business model Yes4. The company explains it’s strategy YesC. Analysis of Development and Performance5. The company describes the main trends and factors likely to affect the future development Yes6. Information provided on environmental, employee, social, community and human rights YesD. Key Performance Indicators7. The review includes analysis using financial performance indicators Yes8. The review uses other key performance indicators including information of environmental matter Yes

CORPORATE SOCIAL RESPONSIBILITY

CSR PRINCIPLE

PRINCIPLE AAll companies have environmental, employment, social, human rights and community impacts. PIRC expects everylisted company to publish comprehensive policies relating to these. Publishing such policies provides a clear messageto both internal and external stakeholders. Such policy documents should be formal statements describing the group’sapproach to dealing with these issues in its operations.PRINCIPLE BThere should be clear lines of accountability and management for each issue.PRINCIPLE CAs part of ensuring stakeholder accountability, boards should have a structured process of consultation andengagement to gauge and respond to a variety of stakeholder views.PRINCIPLE DPerformance indicators are published for the main impacts identified. There should be evidence of formal proceduresin place for monitoring performance and evaluating outcomes against established indicators.PRINCIPLE EAudits, external standards and independent verification should be used.

ENVIRONMENTAL BEST PRACTICE

BEST PRACTICE PRINCIPLE AND CRITERIA: ENVIRONMENT ANALYSIS

A. There should be a comprehensive, published policy1. Group-wide environmental policy published YesB. There should be clear lines of accountability and management2. Board-level responsibility for environmental issues identified YesC. Evidence of procedures for stakeholder engagement3. Environmental standards required of suppliers No4. Evidence of structured consultation process to gauge stakeholder views NoD. Companies should report fully on performance5. Target setting disclosed Yes6. Performance evaluated against targets YesE. Audits, external standards and independent verification7. Methodology used to calculate carbon emissions is disclosed Yes8. Environmental reporting is externally verified No


UNIT 2014 2013 KPI SET TARGET SET

GGE - Direct tCO2 750,523 765,526 Y YGGE - Indirect tCO2 66,677 68,966 Y YWater Consumption M3 n/d n/dLandfill t n/d n/d

*GGE - Greenhouse Gas Emissions *t - Metric Tonne

ANALYSIS: ENVIRONMENT

National Express have a comprehensive, Group-wide environmental policy.

The Safety and Environment Committee undertake responsibility for environmental matters on behalf of the Board.

It is not evident that the Group impose environmental standards on suppliers. We maintain that the social andenvironmental concerns of a product or service extend through its life cycle and if mismanaged can pose reputationalrisks. There is no evidence to suggest that a structured consultation process to gauge stakeholder views in anenvironmental context is in place. We would hope to see this rectified in future as we maintain best practice is canvassingstakeholder views and using the feedback to review business policy and procedure.

PIRC are pleased to see a wide range of non-financial KPI’s that are measured against specific, time-sensitive targets.

Although the Group were awarded a ’B’ from the CDP but we would hope to see environmental data verified by an externalauditor. PIRC would like to see all CSR reporting independently assured as a safeguard to business accountability andintegrity.

EMPLOYMENT BEST PRACTICE

BEST PRACTICE PRINCIPLE AND CRITERIA: EMPLOYMENT ANALYSIS

A. There should be a comprehensive, published policy1. Group-wide employment policy published Yes2. Health and safety policy published Yes3. Employment policy includes a commitment to equal employment opportunies Yes4. Group-wide human rights policy published NoB. There should be clear lines of accountability and management5. Board-level responsibility for human resource issues indentified YesC. Evidence of procedures for stakeholder engagement6. Trade union negotiating framework, works councils or similar strategic-level procedures for

information and consultationYes

7. Company undertakes regular employee satisfaction surveys YesD. Companies should report fully on performance8. Employment performance indicators are disclosed Yes9. Target setting disclosed NoE. Audit, external standards and independent verification10. Performance evaluated against targets No

ANALYSIS: EMPLOYMENT

National Express have a comprehensive, Group-wide equal opportunity employment policy.

Matters reserved for Board approval include health and safety, workplace rights and human rights.

The Group regularly undertake employee satisfaction surveys and use the feedback to influence the workplace whichis welcome. We would like to see more disclosure on the feedback and what has been done as a result of employeeconsultation to meet best practice of stakeholder engagement. Dialogue takes place regularly with trade unions andother employee representatives on a wide range of issues which is pleasing.


PIRC are pleased to see that employment performance indicators, employee engagement, are one of the components ofthe Group’s non-financial KPI’s. Independent assessors, Arthur D Little, have reported a year on year improvement in ourFatalities and Weighted Injuries Index measure of safety of 17% and a reduction in total responsible harm of 54% in fouryears. We would like to see some more specific, time-sensitive and measurable targets for the benefit of shareholders tobe able to gauge an all-round view of company performance.

Employment performance is not evaluated against targets.

COMMUNITY INVESTMENT BEST PRACTICE

BEST PRACTICE PRINCIPLE AND CRITERIA: COMMUNITY INVESTMENT ANALYSIS

A. There should be a comprehensive, published policy1. Group-wide community policy published YesB. There should be clear lines of accountability and management2. Board-level responsibility for community issues identified YesC. Evidence of procedures for stakeholder engagement3. Evidence that the company is forming partnerships with external bodies Yes4. Evidence that the company uses feedback to develop appropriate procedures NoD. Companies should report fully on performance5. Company provides performance indicators to evidence progress NoE. Audits, external standards and independent verification6. Company reporting is in accordance with GRI or has had external review No

UNIT 2014 2013

Cash Donations (UK) GBP n/d n/dCash Donations (Global) GBP n/d 356,000Other Company Giving (in Kind) GBP 582,012 n/dPolitical Donations (Europe) GBP n/d 0Political Donations (outside EU) GBP n/d 0

ANALYSIS: COMMUNITY

National Express have a comprehensive, Group-wide community policy.

It is the Board’s responsibility to review and approve Group-wide policies including charitable and political donations.

Amongst others, National Express have formed partnerships with external bodies within the community such as WestMidlands ’Routes to Work’. There is no evidence to suggest that the Company use feedback from the community todevelop appropriate business procedures which PIRC would hope to see rectified in future to demonstrate effectivestakeholder management.

There is no evidence to suggest that National Express company reporting is in accordance with GRI nor had any externalreview. PIRC recommends that companies utilise the guidelines on best practice for reporting from parameters such asthe GRI or IRI for effective report compilation. Validation from an external source highlights business transparency toshareholders and honest business management.

APPENDIX

LISTING RULE ANALYSIS

1. There is a statement of how the company has applied the UK Corporate Governance Code’s principal Yes2. There is a compliance statement specifying the code provisions with which the company has not

complied with.Yes

3. The board considers that the company complied with the Code in full for the whole. No4. Is the UK Corporate Governance Code compliance statement complete Yes


ADVISORSROLE NAME

Company Secretary Sandy Forbes


For Private Circulation only

c©Copyright 2015 PIRC Ltd

Researcher: Vincent LatourEmail: [email protected]

Information is believed to be correct but cannot be guaranteed. Opinions and recommendations constitute ourjudgement as of this date and are subject to change without notice. The document is not intended as an offer,

solicitation or advice to buy or sell securities. Clients of Pensions & Investment Research Consultants Ltd may have aposition or engage in transaction in any of the securities mentioned.

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