Corporate governance

This report for shareholders sets out Dairy Crest’s approach to and compliance with the principles contained in the Combined Code on Corporate Governance published by the Financial Reporting Council in June 2008 and explains any departure from its provisions. This report has been prepared following the main principles of the Code. Those not referred to in this report are dealt with elsewhere in the Annual Report. The relevant parts of this report have been reviewed by Ernst & Young LLP and their opinion is set out on here.

The Board

Code main principle A.1: “Every company should be headed by an effective board, which is collectively responsible for the success of the company.”

Dairy Crest’s Board recognises its responsibility to provide entrepreneurial and responsible leadership to the Group within a framework of prudent and effective controls (described below) allowing assessment and management of the key issues and risks impacting the business. The Board sets Dairy Crest’s overall strategic direction, reviews management performance and ensures that the Group has thenecessary financial and human resources in place to meet its objectives.

The Board is satisfied that the necessary controls and resources existwithin the Group to enable these responsibilities to be met.The Board also ensures that the principal goal of the Company is to create shareholder value, while having regard to other stakeholder interests and takes responsibility for setting the Company’s values and standards. Accordingly, the long-term interests of shareholders, together with consideration of the wider community of interests represented by employees, customers and suppliers, and community and the environment are factored into the Group’s management processes. They are reinforced through employee participation in share ownership plans. Appropriate account is also given to social, environmental and ethical issues within the Company’s control and risk assessment processes. The steps taken to achieve these goals are communicated to shareholders and other interested parties through the Company’s External Affairs Director, the Company’s website (www.dairycrest.co.uk) and to employees via the Group intranet and through formal and informal briefings and newsletters. Through formal policies (summaries of which are published on the Company’s website) the Board seeks to engender a culture where business ethics, integrity and fairness are values that all employees endorse and apply in their everyday conduct.

During 2009/10, the Company continued its programme of embedding its core values with employees. Details of activity undertaken during the year are set out in the Corporate Responsibility Report here. Further details will be provided in the online Corporate Responsibility Report which will be published on the Company’s website in the summer.

In 2009/10 the Board met eight times, one of those meetings was held at the Group’s national distribution centre in Nuneaton. Details of Directors’ attendance at meetings during the year are set out in the table here.

There is a documented schedule of matters reserved to the Board including strategy and management, financial structure and capital, reporting and controls, Board and Committee appointments, executive remuneration, dividend policy and corporate governance compliance. During 2009/10, the Board received regular briefings upon the Group’s performance (including detailed commentary and analysis) and key issues and risks affecting the Group’s business. Amongst other matters, it reviewed the content of the Group’s risk register and the Group’s Health & Safety policies, processes and performance. Reports on Group operations, human resources, governance and regulatory matters affecting the Group were provided to the Board on a regular and timely basis. Briefings on market activity, together with the views of shareholders and analysts on the Company, were also provided to the Board.

The Group maintains appropriate insurance cover for Directors and Officers and in 2005 the Articles were amended to provide that the Company shall indemnify its Directors and other Officers out of the assets of the Company to the extent permitted by law.

The Chairman periodically meets individually or collectively with the Non-executive Directors in the absence of Executive Directors. The process for appraising the Chairman’s performance is set out below.

Board committees

Summary

There are five principal Board Committees: Audit; Remuneration; Nomination; Corporate Responsibility; and the Management Board. The roles and responsibilities of each of these Committees are detailed below. All the Audit and Remuneration Committee members and a majority of Nomination Committee members are independent Non-executive Directors under the Code. The Committees are provided with sufficient resources via the Company Secretariat and, where necessary, have direct access to independent professional advisers to undertake their duties.

Audit Committee

Andrew Carr-Locke was appointed chairman of the Audit Committee on 1 August 2009 when David Richardson, who had during the year until then chaired the Committee, stood down from the Board. The other members are Howard Mann, Neil Monnery and Carole Piwnica. Anthony Fry was a member until he stood down from the Committee on his appointment as Chairman. Andrew Carr-Locke is a Fellow of the Chartered Institute of Management Accountants. Consistent with the Guidance on Audit Committees (formerly known as the Smith Guidance), all members of the Committee are independent Non-executive Directors. Andrew Carr-Locke is deemed by the Board to be the Audit Committee financial expert with recent and relevant financial experience and independent for the purposes of the Code. All of the Committee members have extensive commercial experience (see here). Further information on the Company’s application of the Code and on the Audit Committee and its work during the year is set out in its report below.

Remuneration Committee

Neil Monnery has chaired the Remuneration Committee for the year ended 31 March 2010. The other members of the Committee are Andrew Carr-Locke, Howard Mann and Carole Piwnica. David Richardson was a member of the Committee until his resignation from the Board on 1 August 2009 as was Anthony Fry until his appointment as Chairman on 1 January 2010. The Committee met five times in 2009/10. Details of Directors’ attendance at meetings during the year are set out in the table here. A detailed description of the Committee’s remit and work during 2009/10, including further information on the Company’s application of the principles of the Code, is contained in the Remuneration Report (which was approved by the Board) on here. Its terms of reference comply with the Code, are available on request and are published on the Group’s website. The full terms and conditions of appointment of the Company’s Non-executive Directors are available for inspection at its registered office and a summary is available on the Group’s website. The chairman of the Committee provided a report to the Board following each meeting of the Committee.

Nomination Committee

As the Committee was leading the process for the appointment of Simon Oliver’s successor as Chairman, in accordance with the Code, Simon Oliver stood down as its chairman (remaining a member until 31 December 2009) and Howard Mann now chairs the Committee. The Committee’s other members are Anthony Fry, Neil Monnery, Andrew Carr-Locke and Carole Piwnica. David Richardson was a member of the Committee until his resignation from the Board. The Committee meets as and when required. During the year it met twice and details of Directors’ attendance at that meeting during the year are set out in the table here. Company executives and advisers attend meetings by invitation only. The Committee updates the Board and makes recommendations as and when required.

The terms of reference of the Nomination Committee are available on request and are published on the Group’s website. The Committee is responsible for succession planning at Board level, overseeing the selection and appointment of Directors and making its recommendations to the Board. It is also responsible, in conjunction with the Chairman, for evaluating the commitments of individual Directors and the balance of skills, knowledge and experience on the Board and ensures that the membership of the Board and its principal committees are refreshed periodically. Where appropriate, the Committee will prepare an outline of the role and capabilities required for particular appointments and use an external search consultancy and/or advertising in relation to Board appointments.

During 2009/10, its focus remained on succession planning for the Board. With the assistance of external consultants the Committee led an internal and external search for candidates to succeed Simon Oliver. Having been identified as a potential candidate, Anthony Fry took no part in the Committee’s consideration of a suitable successor for Simon Oliver. The Committee also led a successful search process, with the assistance of external consultants, resulting in the appointment of Andrew Carr-Locke.

Corporate Responsibility Committee

The Corporate Responsibility Committee is chaired by Carole Piwnica. The Committee, whose other members are Anthony Fry, Howard Mann, Neil Monnery, Andrew Carr-Locke, Mark Allen, Arthur Reeves (Director of External Affairs), Rob Tansey (Group Human Resources Director) and Robin Miller (Company Secretary & General Counsel), oversees the Group’s corporate responsibility programme and ensures that key social, ethical and environmental risks are identified, assessed and prioritised accordingly. Mark Allen, Arthur Reeves, Rob Tansey and Robin Miller were appointed to the Committee on 28 January 2010. Until his resignation from the Board on 1 August 2009, David Richardson was a member of the Committee. Terms of reference for the Committee are available on request and are published on the Group’s website. Details of the Committee’s activities during 2009/10 are set out in the Corporate Responsibility Report here.

Management Board

The Chief Executive chairs the Management Board which comprises the other Executive Directors, the Company Secretary & General Counsel and the Group Human Resources Director. Other senior executives, such as the Director of Group Financial Control and Director of Corporate Development attend by invitation. The Management Board is responsible, amongst other matters, for implementing the Group’s strategic direction, monitoring the performance of the business and its control procedures on a day-to-day basis. Members normally meet weekly.

Other committees

The Group’s Strategy and Policy Leadership Team, chaired by the Chief Executive, which consists of Executive Board members and other senior executives meets periodically. The Strategy and Policy Leadership Team is used to assist the Executive Directors in the execution of their duties by helping to shape and influence the Group’s strategy and policy. Through its diverse membership representing the various constituencies of the Group it helps to ensure that key stakeholders are consulted and have the opportunity to input into the design and preparation of the Group’s strategy, policy and key business decisions. Within each of the Group’s business units there are operating boards responsible for monitoring the performance of those business units. To ensure consistency of approach and cross-learning, members of the Strategy and Policy Leadership Team also chair Group leadership teams responsible for the following areas: finance; information technology / systems; supply chain; human resources; innovation; marketing; sales; vision & values; Health and Safety. Reports are provided from these various leadership teams, as appropriate, to the Management Board, the Strategy and Policy Leadership Team and the Board.

Chairman and chief executive

Code main principle A.2: “There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.”

There is a clear division of responsibilities between the roles of Chairman (who serves in a non-executive capacity) and Chief Executive which is set out in writing and which has been approved by the Board.

Board balance

Code main principle A.3: “The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.”

As at the date of this report, the Board comprises three Executive Directors and four Non-executive Directors (excluding the Chairman). Anthony Fry is Non-executive Chairman and Mark Allen, Chief Executive; Alastair Murray, Group Finance Director; Martyn Wilks, Executive Managing Director (Foods); Andrew Carr-Locke, Non-executive Director and chairman of the Audit Committee; Howard Mann, Non-executive Director and Senior Independent Director and chairman of the Nomination Committee; Neil Monnery, Non-executive Director and chairman of the Remuneration Committee; and Carole Piwnica, Non-executive Director and chairman of the Corporate Responsibility Committee.

Biographies of each of the current Directors, their responsibilities and principal Board Committee memberships can be found here.

During 2009/10, all the Non-executive Directors (including the Chairman) confirmed to the Board that they had sufficient time available to fulfil their obligations as Directors and, should any individual’s position change, that they would inform the Board. Details of the Chairman’s other significant professional commitments are included in his biography here.

The Board considers all the Non-executive Directors to be independent. Anthony Fry was considered independent on his appointment as Chairman. The Code states that the test of independence is not appropriate in relation to the Chairman after his appointment.

Appointments to the Board

Code main principle A.4: “There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.”

Appointments to the Board and its Committees are reserved for the Board, based on recommendations from the Nomination Committee. The appointment and removal of the Company Secretary is a matter reserved to the Board as a whole.

Information and professional development

Code main principle A.5: “The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.”

Under the Chairman’s stewardship the Company Secretary advises the Board on all governance matters and ensures Board procedures are followed and applicable rules and regulations complied with.

The Company Secretary ensures that Directors undergo a comprehensive induction programme on appointment. Andrew Carr-Locke’s induction programme included visits to a number of the Group’s main operating sites (Foston, Nuneaton, Crudgington, Severnside, Frome and Davidstow). He visited the Group’s milk delivery depot at Purley (South East London) and undertook a milk round accompanying a milkman based there. He also met with management and staff representing a cross section of the business including at the Group’s Aldershot offices (Household Division) and at the Group’s head office in Esher. Particularly in light of his appointment as chairman of the Audit Committee, he also met with the Group Finance Director, Director of Group Financial Control, Head of Group Internal Audit and the Ernst & Young LLP engagement partner.

Directors variously receive independent training on technical accounting and other governance related matters from professional service providers and institutions and bulletins from the Group on developments in the dairy sector generally. Through meetings and presentations by management below Board level and visits to operational sites, the Directors keep abreast with the Group’s business.All Directors individually, and each of the Board Committees, have access to the advice and services of the Company Secretariat and the Secretary. They all receive from the Company Secretariat a regular report on corporate governance issues. There are also procedures in place enabling Directors in the furtherance of their duties to seek independent professional advice at the Company’s expense.

Performance evaluation

Code main principle A.6: “The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.”

The Board conducts an annual evaluation of individual Director’s performance, its own performance and that of its Committees. The evaluation process, designed to improve the Board’s effectiveness, is normally conducted as follows:• Following completion of a self-assessment questionnaire by each Director, the Chairman meets with them individually to appraise their performance and effectiveness and to identify any training requirements.

Each Director completes a questionnaire appraising the Chairman’s performance. Using the output from the completed questionnaires the Non-executive Directors, led by the Senior Independent Director, meet in the absence of the Chairman to evaluate the Chairman’s performance. The Senior Independent Director then meets with the Chairman to discuss the outcome of the evaluation of his performance, following which the whole Board considers the Chairman’s performance with him.
The Chief Executive appraises the performance of the other Executive Directors with regard to their management and operational responsibilities in accordance with the Company’s normal performance and development review procedures.
Having dealt with individual Director’s performance, the Board collectively considers the output of the evaluation questionnaires in so far as they relate to the effectiveness of the Board in general and its Committees.

The Board’s evaluation of individual Director and Board performance for 2009/10 was conducted in March 2010. In accordance with its normal practice each Director completed individual self-assessment, Board and Committee evaluation and Chairman’s performance assessment questionnaires. As the Chairman had only been appointed to that role effective 1 January 2010, in a departure from normal practice, the Board decided that a collective review of performance in 2009/10 would be the most effective and appropriate evaluation method. The Board focused on a review of Board practices, focus, efficiency and effectiveness and activity for the coming year, as well as how Anthony Fry could best add value to the Board and Group in his new role as Chairman. The performance evaluation process showed that Board processes and frequency of meetings were satisfactory, that the level of information provided was good and that Board relationships were strong with open debate on all subjects. The Board was satisfied that its Committees operated effectively but could be further enhanced by tailoring the composition of certain of them. In the case of the Corporate Responsibility Committee, membership has been extended to include the Chief Executive and senior executives.

Re-election

Code main principle A.7: “All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board.”

The current Articles require that all Directors are subject to election by shareholders at the first AGM following appointment and thereafter to re-election at least every three years. Details of the Directors retiring and standing for re-election at the 2010 AGM are set out here in the Directors’ report.

The contribution that each of the candidates seeking re-election by shareholders makes to the Group was evaluated by the Board. Having regard to the roles that they perform and individual input and contribution they make, the Board concluded that each candidate’s performance more than justified nomination for re-election by shareholders.

Risk management and internal controls

Code main principle C.2: “The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.”

Introduction

The Board has overall responsibility for ensuring a sound system of internal control and risk management. The schedule of written matters reserved to the Board ensures that the Directors are responsible for the control of, amongst other matters, all significant strategic, financial and organisational risks.

An overview is set-out here which are incorporated by reference into the Directors’ Report. To manage these and other commercial and operational risks the Group has an established programme that assists management throughout the Group to identify, assess and mitigate business, financial, operational and compliance risks on a continuous basis. The Board views management of risk as integral to good business practice. The programme is designed to support management’s decision making and to improve the reliability of business performance.

Internal controls

The Directors have overall responsibility for the Group’s system of internal control and risk management and for reviewing its effectiveness to support its strategy and objectives. The systems of internal control are based on an ongoing process of identifying, evaluating and seeking to manage key risks and includes the preparation and refreshment of divisional risk registers and the Group risk register together with appropriate risk mitigation activities along with the other risk management processes set out here. The systems of internal control were in place throughout the year and up to the date of approval of the Annual Report and financial statements. The effectiveness of these systems has been periodically reviewed by the Audit Committee and the Board, in accordance with the Turnbull Committee Guidance on Internal Control (revised October 2005).

Control systems

The main components of the organisation for internal control are summarised below. Their foundation is in the considerable value that the Group places, throughout its activities, on seeking to ensure that employees are of the highest quality and integrity. Formal control is exercised through a management structure, which includes clear lines of responsibility and documented delegations of authority from the Board. Processes underpinning the financial reporting systems are managed and monitored by line and functional management and regular reporting. Separately, the effectiveness of these internal controls is reviewed by an Internal Audit function that operates on a Group wide basis. It reports its results to the executive management team and directly to the Audit Committee. These controls and processes have been in place for the year under review and up to the date of approval of the Annual Report and Accounts.
Board – the Board exercises its responsibilities through an organisational structure with clearly defined levels of responsibility and rules relating to delegated authorities. The Board meets regularly throughout the year and receives oral and written presentations to maintain control over strategic, financial, operational and compliance matters. The Management Board is responsible for monitoring financial performance, assessing capital expenditure proposals, agreeing media spend, senior management appointments and embedding risk management and controls in the Group. The Managing Director of each Division, in conjunction with senior management, operates and maintains controls appropriate to its own activities which conform to Group policies and procedures.
Financial reporting – there is an annual budget presented to and approved by the Board which includes consideration of the major business and financial risks, an assessment of the likelihood of crystallisation and actions in place to mitigate these risks. Each Division is required to report monthly to the Board on financial performance. Monthly financial information includes trading results, balance sheet and cash flow information by business Division with comparison against prior year and budget. Each Division periodically reassesses its forecast for the financial year. Annually, a strategic plan is also presented to the Board, which reviews financial projections for the following three years and includes consideration of current and likely future strategic, operational and market environment matters. The Audit Committee with input from the Group’s Internal Auditors exercises oversight over the Group’s control processes designed to ensure the integrity of internal and external financial reporting. The use of a standard accounting manual by finance teams throughout the Group and a robust system of monthly reconciliation and review ensures that transactions and balances are recognised and measured in accordance with prescribed accounting policies and that information is appropriately reviewed and reconciled as part of the reporting process. The use of a standard general ledger structure and one chart of accounts ensures that information is gathered and presented in a consistent way that facilitates the production of the consolidated financial statements.
Accounts Reviews – the performance of each business Division and its management of the risks related to it are reviewed monthly by the Chief Executive, Group Finance Director, Executive Managing Director (Foods), Director of Group Financial Control, External Affairs Director and other senior managers in Accounts Review meetings. Amongst other matters the review includes a detailed analysis of each Division’s key risks and plans for mitigation as well as the continued appropriateness of those risks. As part of the continual risk management cycle, additional key risks together with plans for mitigation are, as appropriate, added to each Division’s risk register. Divisional risk registers are further summarised into a Group risk register which is reviewed by the Board
Business Division reviews – on a quarterly basis, each business Division is required to complete a self-assessment controls questionnaire that requires the approval of business unit management. In addition, the Audit Committee and the Management Board receive copies of all Group Internal Audit reports which detail audit issues noted and corrective action plans. They also receive reports from the external auditor on the conclusions of their interim review and final audit.

Control of significant risks

As required by the Code, the Board has established an ongoing process, in accordance with the Turnbull Committee Guidance On Internal Control (revised October 2005), to identify, evaluate and manage significant risks faced by the Group. During the year the Audit Committee reviewed the Group’s risk register process and endorsed the process described here which is intended to ensure a continual appraisal and re-appraisal of risk, the on-going relevance of the Group’s risk registers and that they are embedded in the Group as an every-day tool for the management of risk. This process, approved by the Board following review by the Audit Committee, includes the consideration of Divisional and Group registers identifying and evaluating the significant Divisional and Group risks and related financial, operational and compliance controls. With oversight from the Board and Audit Committee (which uses the services of the Group Internal Audit function), individual members of the Group’s senior management team are responsible for the ownership and mitigation of significant risks. The Audit Committee, the Board, the Management Board and senior management in Accounts Reviews regularly review the identified risks, changes in their status and the composition of the Group’s risk matrix.

Function of controls

During the year the Board has reviewed the effectiveness of the Group’s system of internal control. The systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives. They can only provide reasonable and not absolute assurance against material errors, losses, fraud or breaches of laws and regulations. The Group’s systems of risk management and control have been used in the process for the preparation of the consolidated Accounts.

Report of the Audit Committee

Code main principle C.3: “The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors.”

Members

Details of the members of the Committee are set out here; with details of their attendance at meetings during the year being set out here.

Terms of reference

The Audit Committee’s terms of reference (available on request and published on the Group’s website) comply with the Code. In March 2010 the Audit Committee reviewed and refreshed its terms of reference including, amongst other matters, their continued compliance with the requirements of the Code, the Turnbull Guidance on Internal Control (October 2005) and the Financial Reporting Council Guidance on Audit Committees (2008). Under its terms of reference, the Committee is responsible for providing advice to the Board on the Group’s interim and financial statements; on accounting policies and on the control of its financial and business risks as well as reviewing the work of the internal and external auditors.

Frequency of meetings

The Audit Committee met four times in 2009/10. The chairman of the Audit Committee provided a report on the work of the Committee and any significant issues that may have arisen at the Board meeting following each Committee meeting.

Attendees at meetings

The Chief Executive, Group Finance Director and Chairman and other senior management attend Committee meetings by invitation of the Committee. Representatives of the Group’s external auditor and the head of Group Internal Audit also attend these meetings by invitation. In 2009/10, the external and internal auditors attended all meetings, had direct access to the Committee during the meetings and time was also set aside for them to have private discussions (jointly and independently) with the Committee,in the absence of management.

Audit Committee activity

During 2009/10, the Committee’s work schedule embraced the Code requirements to:

Monitor the integrity of the financial statements of the Company, and any formal announcements relating to the Group’s financial performance, including reviewing significant financial reporting judgements and any disclosures contained in them.
Review the Company’s internal financial controls and its internal control and risk management systems and to make recommendations to the Board.
Monitor and review the effectiveness of the Group’s Internal Audit function.
Make recommendations to the Board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor.
Review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements.
Review the Group’s policy on the engagement of the external auditor to supply non-audit services and report to the Board, identifying matters in respect of which it considers action or improvement is needed and make recommendations as to the steps to be taken.

The Committee‘s work during the period and up to the date of this report included:

Reviewing the Interim Financial Statements, Preliminary Announcement and the Annual Report and Accounts prior to their submission to the Board. In doing so it took into account the external Auditor’s view and considered reports from financial management and Group Internal Audit.
Reviewing significant accounting policies, financial reporting issues and judgements used in the preparation of the Company’s Preliminary Announcement and Interim and Final financial statements.
Reviewing management’s Letters of Representation in connection with the Company’s financial statements and the Auditor’s Management Letter.
Reviewing areas where control weaknesses had been identified by Group Internal Audit or the external Auditor and monitoring the mitigation and remediation plans of management.
Reviewing the regular reports of the external Auditor including the effectiveness of the Group’s internal controls.
Receiving and reviewing regular reports from the Group’s Internal Audit function.
Approving the external audit plan (including audit scope, level of materiality, resources dedicated to the audit engagement, the seniority expertise and experience of the engagement team), and satisfying itself as to the appropriateness and adequacy of the plan.
Evaluating the performance of the external Auditor and satisfying itself as to the effectiveness of the audit.
Reviewing the Group’s risk management processes and controls; and their effectiveness.
Reviewing the effectiveness of the Group’s whistle blowing procedures and satisfying itself that they allow for appropriate investigation and suitable follow up actions.
Reviewing the effectiveness of the Committee.

External auditor

The Committee is responsible for overseeing the relationship with the external Auditor.

During the year, the Committee:

Approved the Audit Engagement Letters and fee proposal, and satisfied itself as to the Auditor’s ability to conduct an effective audit for such fee.
Reviewed and assessed the external Auditor’s independence and objectivity taking into account relevant UK professional and regulatory requirements. In doing so the Committee reviewed the external Auditor’s own policies and procedures to safeguard its objectivity, independence and integrity together with its representations as to independence. The Committee received assurances from the Audit Engagement Partner that the external Auditor’s reward and remuneration structure includes no incentives for audit engagement partners to cross sell non-audit services to audit clients.
Approved the annual Audit Plan and ensured that it was consistent with the scope of the Audit Engagement.
Reviewed the findings of the audit, including discussion of any major issues arising, any accounting and audit judgements and the internal control reports (including responses from management and any proposed remedial action).
Reviewed the effectiveness of the audit and the external Auditor.

Internal audit function

The Committee is required to assist the Board to fulfil its responsibilities relating to the adequacy of the resourcing and plans of the Group Internal Audit function. In doing so, the Committee:

Reviewed and assessed the annual Internal Audit Plan and progress against it throughout the year.
Reviewed all reports on the Group from Internal Audit.
Reviewed the interaction between the Internal Audit function and external Auditor.
Reviewed and monitored management’s responsiveness to the findings and recommendations of Group Internal Audit.
Reviewed a report from the head of Group Internal Audit on risk management & control.
Reviewed Group Internal Audit’s charter dealing with thatfunction’s role, scope, resourcing, reporting responsibilities, organisational independence and assessment.
Reviewed and endorsed a proposal for independent review of the effectiveness of Group Internal Audit.

Reappointment of Ernst & Young LLP

Ernst & Young LLP was first appointed as external Auditor to the Company in 1996. There are no contractual restrictions on the Company with regard to its appointment. The Audit Committee has not considered it necessary since its initial appointment to require the firm competitively to tender for the audit work. In the light of the assessments and review undertaken and having considered a recommendation of the Committee to re-appoint Ernst & Young LLP as the Company’s and Group’s external Auditor, the Board endorsed the Committee’s recommendation which was approved by shareholders in July 2009.

At its meeting in May 2010, the Audit Committee considered the appropriateness of the re-appointment of Ernst & Young LLP as the Group’s external Auditor for the 2010/11 year. In doing so it reviewed the public report on the 2008/09 inspection of Ernst & Young LLP published by the Audit Inspection Unit of the Financial Reporting Council, and the report of the Audit Inspection Unit of the Financial Reporting Council following its 2008/09 audit quality inspections of the audit practices of the nine accounting firms who are subject to full scope inspections by the Audit Inspection Unit, including Ernst & Young LLP.

Taking into account the Audit Inspection Unit’s findings as well as the output of the Committee’s review of the external Auditor’s independence and objectivity, and, the effectiveness of the audit process, which it commenced at its March 2010 meeting, together with other relevant review processes conducted throughout the year, the Committee was satisfied that it should recommend to the Board the re-appointment of Ernst & Young LLP as the Company’s and Group’s external Auditor at the AGM on 20 July 2010.

Communication with investors

Code main principle D.1: “There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.”

The Group believes it is important to explain business developments and financial results to its shareholders and to understand any shareholder concerns, and that suitable arrangements are in place to ensure a balanced understanding of the issues and concerns of major shareholders. The Chief Executive and Group Finance Director have primary responsibility for investor relations. They are supported by the Company’s External Affairs Director who, among other matters, organises presentations for analysts and institutional investors and holds meetings with key institutional shareholders to discuss strategy, financial performance and investment activities immediately after the full year and interim results announcements. Slide presentations made to institutional shareholders are also available on the Company’s website. All the Non-executive Directors and, in particular, the Chairman and Senior Independent Director, are available to meet with major shareholders, if such meetings are required. Further financial and business information is available on the Investor Centre section of the Company’s website.

Feedback from meetings with shareholders is provided to the Board to ensure that the Non-executive Directors have a balanced understanding of the issues and concerns of major shareholders. This includes communication with the shareholders at the AGM, regular feedback from the Chief Executive and the Group Finance Director on their meetings with major shareholders, and periodic reports to the Board on investor relations together with feedback from the Company’s brokers on the views of major shareholders.

The principal method of communication with private shareholders is through the Annual Report and Interim Statement, the AGM and through the Company’s website.

Annual general meeting

Code main principle D.2: “The board should use the AGM to communicate with investors and to encourage their participation.”

A business review is presented by the Chairman at the AGM to facilitate shareholder understanding of the Group’s activities. Arrangements are made for all Executive Directors, the Chairman, the Senior Independent Non-executive Director, the remaining Non-executive Directors and the chairmen of Board Committees to attend the AGM and to be available to answer shareholders’ questions. All Directors attended the AGM in July 2009. Notice of the AGM is, in accordance with the applicable Companies Act and the Articles, either posted in hard copy to shareholders or posted on the Company’s website at least 21 days before the date of the AGM. Resolutions are proposed for each substantially separate issue and details of the proxy voting on each resolution are announced at the AGM after the results of the show of hands is known and are posted on the Company’s website following the conclusion of the meeting.

The Company counts all proxy votes and indicates the level of proxies lodged on each resolution. It also publishes the level of votes for and against resolutions and the number of abstentions. The Company ensures that votes cast are properly received and recorded.

Separate resolutions are proposed on each substantially discrete subject and the Company does propose a resolution at the AGM relating to the Annual Report and financial statements.

Access to information

Electronic communication continues to become the principal medium for shareholders, providing ready access to shareholder information and reports. Recognising this, Annual Reports and Annual and Interim financial statements are published on the Company’s website. Pursuant to changes introduced by the Companies Act 2006, the Company sought shareholder approval at the 2007 AGM, subject to certain requirements, to communicate electronically with its shareholders. Other information which shareholders and third parties are entitled to access is made available in accordance with legislative and regulatory requirements. Where company law permits, the Company notifies shareholders of the electronic publication of notices of meetings on its website.

Compliance with the provisions contained within the Code

Throughout the year the Group was in compliance with the provisions of Section 1 of the Code except for provision A.1.3. where for the reasons stated at here, the Senior Independent Director together with the other Non-executive Directors did not meet without the Chairman present to appraise his performance.

Approval

The Corporate Governance report and the Audit Committee report contained in it have been approved by the Board.