Tomkins Annual Report

Key governance principles

The Tomkins Board promotes the highest standards of corporate governance within the Company through its support and application of the Principles of Good Governance set out in section 1 of The Combined Code on Corporate Governance. A summary of the Company’s system of applying the principles and the manner in which the provisions in section 1 have been complied with are set out below. Section 1 of the Combined Code sets out the main and supporting Principles of Good Governance for companies, which are split into the following areas:

1. Directors
2. Remuneration
3. Accountability and audit
4. Shareholder relations

Each of these areas is addressed in turn.

1. Directors

A. The Board

The Company is controlled through its Board of Directors, whose main roles are to:
– Create value for shareholders;
– Provide leadership of the Company;
– Approve the Company’s strategic objectives;
– Ensure that the necessary financial and other resources are made available to the management to enable them to meet those objectives; and
– Operate within a framework of effective controls which enables the assessment and management of principal business risks.

The Board, which has reserved certain specific matters to itself for decision (set out in a Schedule of Reserved Matters), is responsible for approving overall Group strategy and financial policy, acquisition and divestment policy and major capital expenditure projects. It also appoints and removes members of the Board and Board Committees, reviews recommendations of the Audit Committee, Remuneration Committee and Nomination Committee, and the appointment of the independent auditor. It also reviews the financial performance and operation of each of the Company’s businesses. In 2007, the Company granted qualifying third party indemnities to the Directors which remain in force at the time of this report.

The Board sets the standards and values of the Company and much of this has been embodied in the Company’s Code of Conduct and Ethics and Human Rights Policy which can be found on the Company’s website, www.tomkins.co.uk. The Code of Conduct and Ethics applies to all Directors, officers and employees, including the principal executive, financial and accounting officers, as required by section 406 of the US Sarbanes-Oxley Act of 2002, the related rules of the US Securities and Exchange Commission and the rules of the New York Stock Exchange. The Code contains provisions (Reporting of Violations) under which employees can report violations of company policy or any applicable law, rule or regulation, including those of the US Securities and Exchange Commission. US employees have the added protection of section 806 of the Sarbanes-Oxley Act of 2002, which prohibits the discrimination by a company or others against an employee where such violations are reported. The current procedure, which is set out in Tomkins’ Code of Conduct and Ethics, provides for information to be given anonymously or by named employees under conditions of confidentiality. Those employees who come forward and give their name are assured that they will receive the full protection of section 806 and no retaliation will take place. This is of particular importance since 52% of the Company’s employees are based in the US. Furthermore, the Company ensures that the principles are applied in other jurisdictions, subject to compliance with local employment and other laws.

The Board has delegated to the Chief Executive responsibility for the day-to-day management of the Group subject to certain financial limits above which Board approval is required. The delegated authority includes such matters as operations, acquisitions and divestitures, investments, capital expenditure, borrowing facilities and foreign currency transactions.

The Board of Directors comprises a Non-Executive Chairman, five additional Non-Executive Directors and two Executive Directors who together, with their different financial, commercial, technical and operational expertise and cultures, bring with them a wide range of experience to the Company.

The Board has determined that David Newlands, Richard Gillingwater, John McDonough, Leo Quinn, David Richardson and Struan Robertson are independent, as they are independent of the Company’s executive management and free from any material business or other relationship with the Company (either directly or as a partner, shareholder or officer of an organisation that has a relationship with the Company). In December 2000, at the request of the Board, the Non-Executive Chairman, David Newlands, temporarily assumed certain executive responsibilities until the recruitment of James Nicol as Chief Executive in February 2002. It is the Board’s view that this short-term arrangement did not affect Mr Newlands’ independence. Accordingly, the Board believes that there are no such relationships that could materially interfere with the exercise of their independent judgement.

Non-Executive Directors are normally appointed for a minimum period of two years, which is renewable by agreement with the Board and is subject to approval by shareholders at the Annual General Meeting (“AGM”). The terms and conditions of appointment of Non-Executive Directors are available for inspection at the Company’s registered office during normal business hours on weekdays and will also be available for inspection at the place of the AGM from 15 minutes before the meeting until it ends. The Combined Code recommends the appointment of a senior independent Non-Executive Director and Sir Brian Pitman served in this capacity until his retirement from the Board at the conclusion of the AGM on 13 June 2007 whereupon Richard Gillingwater was appointed senior independent Non-Executive Director. The roles of Non-Executive Directors are to:
– scrutinise the performance of management in meeting the agreed objectives;
– help develop proposals on strategy; and
– monitor the reporting of performance, including satisfying themselves as to the integrity of financial information and that financial controls and systems of risk management put in place by the Company are robust and effective.

They meet together from time to time in the absence of management and the Chairman normally presides over such meetings.

On appointment, Non-Executive Directors receive a range of information about the Company via an induction programme, which aims to provide an understanding of the Company as a whole, including its strategy, structure, geographical spread of operations, financial position, markets, products, technologies and people, as well as their legal responsibilities as a Director and, where appropriate, any training that is necessary for them to carry out their duties effectively. The Board and its Committees receive, in a timely manner, detailed information concerning the matters to be discussed to enable them to make informed decisions. The Directors have access to the advice and services of the Company Secretary, whose removal may be effected only with the approval of the Board, and can obtain independent professional advice at the Company’s expense in furtherance of their duties, if required.

The Board ordinarily meets not less than five times a year, and will hold additional meetings when circumstances require. During the year ended 29 December 2007, the Board met on five occasions. Between meetings, the Chairman and Chief Executive update the Non-Executive Directors on current matters and there is frequent contact to progress the affairs of the Company. With the encouragement of the Chief Executive, the Non-Executive Directors have regular contact with senior management through their presentations at Board meetings, at strategic reviews and on other occasions.

Attendance by each individual Director at Board and principal Committee meetings held during 2007

Seven of the Directors served for only part of 2007. These Directors were Jack Keenan (retired 13 June 2007), Ken Lever (resigned as a Director on 1 October 2007, with his employment ceasing on 31 October 2007), John McDonough (appointed 14 June 2007), Iain Napier (appointed 14 June 2007 and resigned 13 December 2007), Sir Brian Pitman (retired 13 June 2007), Leo Quinn (appointed 6 July 2007), and John Zimmerman (appointed 1 October 2007). Richard Gillingwater was unable to attend one Board meeting and one Audit Committee meeting. Sir Brian Pitman was unable to attend one Board meeting and John McDonough was unable to attend one meeting of the Corporate Social Responsibility Committee. The remaining Directors attended all Board and Committee meetings for the periods in 2007 in which they held their directorships. During the year, other Directors have attended meetings of the Audit Committee, Remuneration Committee, Nomination Committee and Corporate Social Responsibility Committee by invitation. These details are not included in the above table. On the rare occasion when a Director cannot attend a meeting, he will normally, prior to the meeting, make his views on the agenda items known to the Chairman or, in respect of Committee meetings, to the Chairman of the respective Committee.

Directors' membership of principal Committees

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At the Company’s forthcoming AGM, and in accordance with the Company’s Articles of Association, James Nicol and David Richardson will retire from the Board by virtue of length of service and will seek reappointment. John McDonough, Leo Quinn and John Zimmerman, having been appointed during the year, will retire in accordance with the Articles of Association and will seek reappointment.

B. Chairman and Chief Executive

There is a clear division of responsibility between the Chairman and the Chief Executive, with neither having unfettered powers of decision with respect to substantial matters. The Chairman is responsible for running the Board and ensures that all Directors receive sufficient relevant information on financial, business and corporate matters to enable them to participate effectively in Board decisions. In advance of each meeting, the Board is provided with comprehensive briefing papers on items under consideration.

The Chairman, David Newlands, is also Chairman of KESA Electricals plc and PayPoint plc. Whilst these are important appointments, the Board of Tomkins believes that the Chairman continues to be able to carry out his duties and responsibilities effectively for the Company.

The Chief Executive’s primary role is the running of the Company’s businesses and the development and implementation of strategy. The Non-Executive Directors have the opportunity to meet with the Chairman and with the Chief Executive periodically, either together or separately, to consider and discuss a wide range of matters affecting the Company, its business, strategy and other matters.

C. Board Committees

The Board has established a number of Committees and receives reports of their proceedings. Each Committee has its own delegated authority as defined in its terms of reference, which are reviewed periodically by the Board. The Board is satisfied that its Committees have written terms of reference which conform with best corporate governance practice. The terms of reference for all Board Committees can be found under “Governance” in the “Responsibilities” area of the Company’s website, www.tomkins.co.uk, or a copy can be obtained by application to the Company Secretary at the Company’s registered office.

The Board appoints the chairmen and members of all Board Committees upon the recommendation of the Nomination Committee. The Company Secretary is Secretary to all Board Committees. The principal Committees, their membership and a brief description of their duties are set out below. Mr J M J Keenan and Sir Brian Pitman retired from the Board at the conclusion of the Company’s AGM on 13 June 2007 and Mr R D Gillingwater replaced Sir Brian Pitman as Senior Independent Director on that date. Messrs. K Lever and I J G Napier resigned from the Board on 1 October 2007 and 13 December 2007 respectively. All stood down from their respective Committee memberships at the date of retirement or resignation.

Audit Committee
Details of the Audit Committee and its work can be found in the Audit Committee report section.

Nomination Committee
The Nomination Committee makes recommendations to the Board on all proposed appointments of Directors through a formal and transparent procedure. The Committee meets as and when required.

In accordance with the Company’s Articles of Association, Directors are subject to reappointment at the AGM immediately following the date of their appointment, and thereafter they have to seek reappointment no more than three years from the date they were last reappointed. The Committee recommends to the Board the names of the Directors who are to seek reappointment at the AGM in accordance with the Company’s Articles of Association.

During the year, four new Board appointments were made. The Nomination Committee was central to the recruitment process, including the appointment of professional advisers and conducting interviews with potential candidates, and the Committee and Board are aware of, and support, the principles set out in section A.4 of the Combined Code relating to appointments to the Board.

Corporate Social Responsibility Committee
The Corporate Social Responsibility Committee meets at least three times a year. The Committee is chaired by an independent Non-Executive Director and its membership also includes the Chief Executive. Its principal role is to determine, on behalf of the Board, the framework or broad policy and objectives in the areas of health, safety and the environment (“HSE”) and propose any amendments to existing policies for approval by the Board. It also reviews management’s performance in the achievement of HSE objectives and reviews HSE reports produced by business units for compliance with all local health, safety and environmental codes of practice, legislation and relevant industry practice.

More details of the work of the Corporate Social Responsibility Committee can be found in the Corporate Responsibility Report to shareholders available on the Company’s website http://www.tomkins.co.uk/.

Remuneration Committee
Details of the Remuneration Committee and its work can be found in the Remuneration Committee report section.

Disclosure Committee
The Disclosure Committee meets as and when required for the purpose of, inter alia, reviewing and approving for release all price-sensitive information relating to the Company and compliance with the Disclosure and Transparency Rules of the Financial Services Authority.

General Purposes Committee
The General Purposes Committee meets as and when required. It comprises Executive Directors and senior executives and the quorum requires the presence of at least one Executive Director. The Committee deals principally with day-to-day matters of a routine nature and matters delegated to it by the Board.

D. Board, Committee and Chairman evaluations

Under the direction of the Senior Independent Director, Richard Gillingwater, evaluations of the effectiveness of the Board, its Committees and Chairman were conducted during the year. The evaluation processes continued with the same approach as the previous year which drew on the experiences of the previous evaluations of the Board and its Committees and concentrated on six key elements:
– the optimum mix of skills and knowledge amongst the Directors;
– clarity of goals and processes;
– tailoring the evaluation to the specific circumstances of Tomkins;
– the culture of candour that encourages constructive evaluation;
– regular reviews of assessment criteria; and
– full disclosure of procedures and criteria to the Board.

Board and Committee
The fifth Board performance evaluation took place during the year, which continued the processes developed in the first four years. A Report was prepared and considered by the Board. The overall view of the Directors was that the Board is the right size and mix of skills to ensure its optimum effectiveness, particularly after the recent changes to membership of the Board. A number of suggestions were made relating to the following:

Dedicated strategy sessions were felt to be of particular use, as a way of ensuring the Board’s involvement in the development of strategy;

It was also felt that the Board’s methods of measuring management performance could be improved in the following ways:
– while the numbers were analysed and the operations explained, it was felt that it would be helpful to see some KPIs which were regularly reported on outside the pure financial numbers;
– the budgeting and reporting process could be simplified; and
– by questioning the trends in return on invested capital and considering the extent of organic growth compared to acquisition.

Additional comments were made in relation to the number, duration and timing of Board meetings and positive comments were made on the quality of operating and financial reporting, supported by high-quality papers and presentations. The Board considered the matters raised by the evaluation and arrangements were made to address each of those matters raised.

The fourth Board Committee performance evaluation reinforced the positive messages that were highlighted in the first three evaluations. The Committees were acknowledged to be well led with strong and experienced members who were well informed and overall the Committees function well. There were some suggestions on improving particular aspects of the work of the Committees, including the distribution of papers and, in relation to the Remuneration Committee, the following points in particular were raised:
– There was a preference to have a greater degree of formal Human Resources (HR) representation and input;
– It was felt that the supporting processes for the Committee might be improved by more regular updates on market trends in remuneration and more frequent reference to external market data.

These concerns have been addressed and the 1 January 2008 review of Non-Executive Directors’ fees and Chairman’s remuneration drew on advice and data supplied by PA Consulting, which took account of the above suggestions. Overall, the Directors continue to believe that the Comittees function well.

Chairman
For the evaluation of the Chairman, the more formal approach adopted in previous years continued, including completion of a questionnaire that sought views across a broad range of the Chairman’s responsibilities. There was considerable positive feedback from Directors on the role of the Chairman and his leadership of the Board. A small number of suggestions were made and the Senior Independent Director discussed these with the Chairman. The Non-Executive Directors discussed the evaluation report with the Senior Independent Director in the absence of executives.

2. Remuneration

See the Remuneration Committee report section.

3. Accountability and Audit

A. Financial reporting

In the Directors’ report, the Board seeks to provide a detailed understanding of each business of the Group, together with a balanced and understandable assessment of the Company’s position and prospects.

B. Internal control

Further information on the internal control environment within which the Group operates may be found in the Directors’ statement on Internal control.

C. Going concern

The Directors are confident, on the basis of current financial projections and facilities available, that the Company and the Group have adequate financial resources to continue in operation for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.

D. “Whistleblower” reporting procedures

Under section 301 of the Sarbanes-Oxley Act of 2002, all public companies, including non-US public companies such as Tomkins, acting through the Audit Committee of the Board, must provide a procedure for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters. The Audit Committee and the Board have agreed a procedure for the confidential and anonymous submission by employees of concerns regarding these matters.

4. Shareholder relations

The Company places a high degree of importance on maintaining good relationships and communications with both institutional and private investors and ensures that shareholders are kept informed of significant Company developments.

To assist members of the Board to gain an understanding of the views of institutional shareholders, at each of its meetings the Board receives an Investor Relations Report, which covers a wide range of matters including a commentary on the perception of the Company and views expressed by the investment community, media reports, share price performance and analysis. Analysts’ reports and estimates are also made available to all Directors. The announcement of quarterly management statements, half-year and full-year results provides opportunities for the Company to answer questions from institutional shareholders covering a wide range of topics. The Chairman, Chief Executive, Finance Director and Investor Relations staff hold an ongoing dialogue with institutional shareholders to ensure the mutual understanding of objectives. The Chief Executive and other senior executives participate in industry conferences, which are attended by existing and potential shareholders. The Company exercises care to ensure that all price-sensitive information is released to all shareholders at the same time, as required by the Listing Rules of the Financial Services Authority and the Securities and Exchange Commission Regulation FD in the US.

The Company’s website provides shareholders and potential investors with information about the Company, including annual and interim reports, recent announcements, investor presentations, share price information, Group policies, corporate responsibility and governance matters. Shareholders are also able to put questions to the Company via its website.

Shareholders also have the opportunity to attend the AGM to put questions to the Board. Full details of the 2008 AGM are in the Circular to Shareholders dated 27 March 2008. It has been the Company’s practice to send the Notice of the AGM and related papers to shareholders at least 20 working days before the meeting and to propose separate resolutions on each substantially separate issue.

The Board notes that section 2 of the Combined Code seeks to encourage more active participation by institutional shareholders, including entering into a dialogue with companies and making considered use of their votes – principles which the Company supports.

Substantial shareholdings

Voting rights notified under the Disclosure and Transparency Rules at 20 February 2008 are as set out in the table below.

Shareholder rights

The Company’s issued share capital is comprised of ordinary shares of 5p each. In addition to such ordinary shares, the Company’s authorised share capital includes convertible cumulative preference shares of US$50 each and convertible cumulative redeemable preference shares of US$50 each, both of which are convertible into ordinary shares. None of such preference shares are in issue, and it is proposed at this year’s AGM that the authority for such preference shares should be removed. See also notes 37 and 41 in the Group financial statements.

Significant agreements and change of control

The Group has issued bonds totalling £400 million. The terms of the bonds entitle the holders to require redemption where there is a change of control of the Company combined with a ratings downgrade. In addition, under the Group’s £400 million credit facility, the lenders are entitled, on a change of control, to require prepayment of amounts outstanding.

In addition, the service agreement of James Nicol entitles him to the payment of one year’s salary, the value of certain benefits and certain additional bonus entitlements where his employment is terminated (either by the company or by himself) within three months after a change of control. Further, the performance conditions for certain of Mr Nicol’s share option entitlements are waived in the event of a change of control.

Compliance statement

Except where indicated, the Company has complied throughout the year ended 29 December 2007 with all the Code provisions set out in section 1 of the Combined Code.

The certifications of the Chief Executive and Finance Director required under section 302 of the US Sarbanes-Oxley Act of 2002, and the related rules of the US Securities and Exchange Commission, will be filed as exhibits to the Company’s Form 20-F. Pursuant to section 303A, the Foreign Private Issuer Annual Written Affirmation was sent to the New York Stock Exchange (“NYSE”) in June 2007, affirming without qualification that Tomkins has complied with the requirements laid down by the NYSE in respect of Foreign Private Issuers.

The Company has placed on its website a general summary of the significant ways in which the Company’s corporate governance differs from that followed by domestic US companies under the NYSE’s listing standards, as required by section 303A.11.

Statement on Directors’ report

Each of the persons who is a Director at the date of approval of the Directors’ report confirms that:
– so far as the Director is aware, there is no relevant audit information of which the auditors are unaware; and
– the Director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 234ZA of the Companies Act 1985.

Approved by the Board on 20 February 2008 and signed on its behalf by