THE COMBINED CODE PRINCIPLES OF GOOD …

1 May 2000 The COMBINED CodeTHE COMBINED CODEPRINCIPLES OF good GOVERNANCE AND code OF BEST PRACTICED erived by the Committee on Corporate Governance from the Committee s Final Report andfrom the Cadbury and Greenbury the Committee s final report we said that, in response to many requests, we intended toproduce a set of PRINCIPLES and code which embraced Cadbury, Greenbury and thecommittee s own work. This COMBINED code fulfils that COMBINED code is now issued in final form, and includes a number of changes made bythe London Stock Exchange, with the Committee s agreement, following the consultationundertaken by the London Stock Exchange on the committee s original COMBINED code contains both PRINCIPLES and detailed code provisions. We understandthat it is the intention of the London Stock Exchange to introduce a requirement on listedcompanies to make a disclosure statement in two the first part of the statement, the company will be required to report on how it applies theprinciples in the COMBINED code .

2 We make clear in our report that we do not prescribe theform or content of this part of the statement, the intention being that companies should have afree hand to explain their governance policies in the light of the PRINCIPLES , including anyspecial circumstances applying to them which have led to a particular approach. It must be forshareholders and others to evaluate this part of the company s the second part of the statement the company will be required either to confirm that itcomplies with the code provisions or - where it does not - provide an explanation. Again, itmust be for shareholders and others to evaluate such our report we make clear that companies should be ready to explain their governancepolicies, including any circumstances justifying departure from best practice; and that thoseconcerned with the evaluation of governance should do so with common sense, and with dueregard to companies individual also make clear in our report that it is still too soon to assess definitively the results of theCadbury and more especially the Greenbury codes.

3 We see this COMBINED code as aconsolidation of the work of the three committees, not as a new departure. We have thereforeretained the substance of the two earlier codes except in those few cases where we take adifferent view from our predecessors. We should in particular like to make clear, in relation tothe detailed provisions in the Listing Rules on directors remuneration, that we envisage nochange except where we take a different view from the Greenbury committee. With twoexceptions, relating to the status of the remuneration committee, and the compensationpayable to an executive director on loss of office, these changes are 1 of the COMBINED code contains the corporate governance PRINCIPLES and codeprovisions applicable to all listed companies incorporated in the United Kingdom.

4 These wouldbe covered by the statement referred to in paragraphs 3-5 above, which will be required by theListing Rules. Section 2 contains PRINCIPLES and code provisions applicable to institutionalshareholders with regard to their voting, dialogue with companies and evaluation of acompany s governance arrangements. These are not matters which are appropriate for theListing Rules to include within the disclosure requirement. Nevertheless we regard Section 2 ofthis COMBINED code as an integral part of our recommendations; we commend it to theorganisations representing institutional shareholders and we hope that at least the majorinstitutions will voluntarily disclose to their clients and the public the extent to which they areable to give effect to these 2000 The COMBINED Code9We have not included in the COMBINED code principle in Chapter 2 of our final report,which reads as follows: External Auditors.

5 The external auditors should independently report to shareholdersin accordance with statutory and professional requirements and independently assurethe board on the discharge of its responsibilities under and above inaccordance with professional guidance. We say in paragraph of the report that we recommend neither any additional prescribedrequirements nor the removal of any existing requirements for auditors in relation togovernance or publicly reported information, some of which derive from the Listing Rules. Thisrecommendation is accepted by the London Stock Exchange. But the existing requirements forauditors will be kept under review, as a matter of course, by the responsible on Corporate GovernanceJune 1998 May 2000 The COMBINED CodePRINCIPLES OF good GOVERNANCESECTION 1 COMPANIESA.

6 DIRECTORSThe listed company should be headed by an effective board which should lead andcontrol the and are two key tasks at the top of every public company - the running of the boardand the executive responsibility for the running of the company s business. Thereshould be a clear division of responsibilities at the head of the company which willensure a balance of power and authority, such that no one individual has unfetteredpowers of board should include a balance of executive and non-executive directors (includingindependent non-executives) such that no individual or small group of individuals candominate the board s decision of board should be supplied in a timely manner with information in a form and of aquality appropriate to enable it to discharge its to the should be a formal and transparent procedure for the appointment of newdirectors to the directors should be required to submit themselves for re-election at regular intervalsand at least every three REMUNERATIONThe Level and Make-up of of remuneration should be sufficient to attract and retain the directors needed torun the company successfully, but companies should avoid paying more than isnecessary for this purpose.

7 A proportion of executive directors remuneration should bestructured so as to link rewards to corporate and individual should establish a formal and transparent procedure for developing policyon executive remuneration and for fixing the remuneration packages of individualdirectors. No director should be involved in deciding his or her own company s annual report should contain a statement of remuneration policy anddetails of the remuneration of each 2000 The COMBINED WITH SHAREHOLDERSD ialogue with Institutional should be ready, where practicable, to enter into a dialogue withinstitutional shareholders based on the mutual understanding of Use of the should use the AGM to communicate with private investors and encourage AND AUDITF inancial board should present a balanced and understandable assessment of thecompany s position and board should maintain a sound system of internal control to safeguardshareholders investment and the company s Committee and board should establish formal and transparent arrangements for considering howthey should apply the financial reporting and internal control PRINCIPLES and formaintaining an appropriate relationship with the company s 2 INSTITUTIONAL INVESTORSS hareholder shareholders have a responsibility to make considered use of their with

8 Shareholders should be ready, where practicable, to enter into a dialoguewith companies based on the mutual understanding of of Governance evaluating companies governance arrangements, particularly those relating toboard structure and composition, institutional investors should give due weight to allrelevant factors drawn to their 2000 The COMBINED CodeCODE OF BEST PRACTICESECTION BoardPrincipleEvery listed company should be headed by an effective board which should leadand control the board should meet board should have a formal schedule of matters specifically reserved to it for should be a procedure agreed by the board for directors in the furtherance of theirduties to take independent professional advice if necessary, at the company s directors should have access to the advice and services of the company secretary, whois responsible to the board for ensuring that board procedures are followed and thatapplicable rules and regulations are complied with.

9 Any question of the removal of thecompany secretary should be a matter for the board as a directors should bring an independent judgement to bear on issues of strategy,performance, resources, including key appointments, and standards of director should receive appropriate training on the first occasion that he or she isappointed to the board of a listed company, and subsequently as and CEOP rincipleThere are two key tasks at the top of every public company - the running of theboard and the executive responsibility for the running of the company s should be a clear division of responsibilities at the head of the companywhich will ensure a balance of power and authority, such that no one individual hasunfettered powers of decision to combine the posts of chairman and chief executive officer in one personshould be publicly justified.

10 Whether the posts are held by different people or by the sameperson, there should be a strong and independent non-executive element on the board ,with a recognised senior member other than the chairman to whom concerns can beconveyed. The chairman, chief executive and senior independent director should beidentified in the annual BalancePrinciple The board should include a balance of executive and non-executive directors(including independent non-executives) such that no individual or small group ofindividuals can dominate the board s decision 2000 The COMBINED CodeCode board should include non-executive directors of sufficient calibre and number for theirviews to carry significant weight in the board s decisions. Non-executive directors shouldcomprise not less than one third of the majority of non-executive directors should be independent of management and freefrom any business or other relationship which could materially interfere with the exercise oftheir independent judgement.