Corporate governance
Maintaining high standards of corporate governance continues to be a priority of the Directors of Donegal Creameries plc. The UK Combined Code is the foundation on which their corporate governance policy is based.

In July 2003, the Financial Reporting Council in the UK issued the revised Combined Code on Corporate Governance which superseded and replaced the Combined Code published in 1998. The Board has reviewed the 2003 Combined Code and it is Group policy to apply all of the relevant main and supporting principles of good governance in the 2003 Combined Code.

The Directors are accountable to the shareholders for good corporate governance and this report addresses how the relevant main and supporting principles of the Combined Code have been applied within the Group.

The roles of the Chairman and the Managing Director
The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives. The Chairman is responsible for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman facilitates the effective contribution of all Directors and constructive relations between the Executive Directors and the other Directors, ensures that Directors receive accurate, timely and clear information and manages effective communication with shareholders.

The Managing Director has direct charge of the Group on a day to day basis and is accountable to the Board for the financial and operational performance of the Group.

Nomination Committee
The Nomination Committee is comprised of 3 Non-Executive Directors, Charles Tindal, who acts as Chairman, Francis Devenney and Marshall Robinson.

Remuneration Committee
The Remuneration Committee is comprised of 3 Non-Executive Directors. Ivan Grier acts as Chairman of the Committee. When necessary, non-Committee members are invited to attend. The Committee’s principal responsibilities are:

• to determine, on behalf of the Board, the remuneration and other terms and conditions of employment of the Managing Director;
• to determine, on behalf of the Board, the pay structures and terms and conditions of other senior personnel (as identified by the Chairman of the Board);
• to act, on behalf of the Board, and take decisions related to pay and pay related matters, as the Chairman of the Board shall determine.
• to act, on behalf of the Board, and take significant decisions on matters such as remuneration policy, benefits, third party recommendations and related issues.

Composition of Board and Remuneration Committee
It is the practice of the Company that a majority of the Board comprises Non-Executive Directors and that the Chairman be non-executive. The Remuneration Committee consists solely of Non-Executive Directors. The Managing Director is fully consulted about remuneration proposals and outside advice is sought when necessary. The current members of the Remuneration Committee are Lexie Tinney, Matt McNulty and Ivan Grier (Committee Chairman).

The terms of reference for the Committee are to determine the Group’s policy on executive remuneration and to consider and approve salaries and other terms of the remuneration package for the Executive Directors and senior personnel.

Remuneration policy
The Group’s policy on senior personnel remuneration recognises that employment and remuneration conditions for senior personnel must properly reward and motivate them to perform in the best interest of the shareholders. Performance related rewards, in which targets are measurable, are a key consideration.

The typical elements of the remuneration package for senior personnel are basic salary and benefits, incentive bonus, pensions and participation in the share option plan.

It is policy to grant options to certain key management across all locations to encourage identification with shareholders’ interests.

Executive Directors’ basic salary and benefits
The basic salaries of Executive Directors are reviewed annually having regard to personal performance, company performance, changes in responsibilities and competitive market practice in the area of operation. Employment related benefits consist principally of a car allowance and participation in the share option scheme. No fees are payable to Executive Directors.

Incentive plan
The Executive Directors are entitled to receive bonus payments as the Remuneration Committee may decide at their absolute discretion.

Share option scheme
At an extraordinary general meeting held on 27 July 2005 a share option scheme for full time executives was approved by shareholders. The scheme permits the grant of options limited to 3% of the ordinary share capital of the Company in any three year period. Options are granted at the discretion of the Remuneration Committee. On 2 May 2006 the Remuneration Committee granted 150,000 share options to Ian Ireland, at an exercise price of €4.35, exercisable between the third anniversary of the grant date and the sixth anniversary of the grant date. No other options have been granted under this scheme.

Directors’ service contracts
The Managing Director has a service agreement appointing him as Managing Director for three years commencing on 1 January 2005 and continuing thereafter unless and until terminated by either party, giving not less than six months notice. This agreement automatically terminates on the Managing Director obtaining the age of sixty-five years.

None of the other Directors has a service contract with any member of the Group.

Directors’ remuneration and interests in share capital
Details of Directors’ remuneration, share options and shareholdings are given on pages 18 to 20 and details of Directors’ pensions are set out below.

Pensions
The two Executive Directors are entitled to benefits under defined contribution scheme pension arrangements.

Audit Committee
The Audit Committee comprises of 3 Non-Executive Directors, Patrick J Kelly (Chairman), Norman Witherow and Matt McNulty. During the year Geoffrey Vance resigned from the Committee and was replaced by Norman Witherow. The Committee held 6 formal meetings during 2006. When necessary, non-Committee members are invited to attend.

The Audit Committee monitors areas of risk and performance by the PLC and ensures the integrity of the Group’s financial statements. The Audit Committee is also responsible for monitoring the effectiveness of the external auditor and audit process and makes recommendations to the Board in relation to the appointment, re-appointment and remuneration of the external auditors. This responsibility also ensures an appropriate relationship between the Group and external audit is maintained, including the review of all non-audit services provided.

The Audit Committee reviews annually the Group’s systems of internal control and the processes for monitoring and evaluating the risks facing the Group. The Audit Committee meets with management as required and meets privately with the external auditor and team.

In 2006 the Audit Committee discharged its responsibilities by:

• reviewing the Group’s draft financial statements for 2005, meeting and reviewing with the external auditor prior to Board approval of financial statements;
• reviewing the appropriateness of the Group’s accounting policies;
• reviewing the potential impact in the Group’s financial statements of significant matters and changes arising during the year;
• reviewing and approving the audit fee and reviewing non-audit fees that may be payable to the Group’s auditor;
• considering the external auditors’ plan for the annual audit of the Group’s financial statements for 2006;
• confirmation of the external auditor’s independence and terms of engagement;
• reviewing and redefining the Group’s system of risk identification assessment and control to ensure their robustness and effectiveness; and
• reporting to the Board on its review of the Group’s systems and internal controls and their effectiveness to meet current, future and strategic requirements.