Corporate Governance

The Board is responsible for the Group’s system of corporate governance and is committed to maintaining high standards. Prior to demerger the system of corporate governance was ultimately the responsibility of the Board of GUS plc. In preparation for the Company’s listing following the demerger from GUS plc, a full review of corporate governance arrangements was undertaken. These arrangements were summarised in the prospectus relating to the Company’s listing published on 14 September 2006 (“the prospectus”). Since the demerger, Home Retail Group has complied fully with the main and supporting principles set out in Section 1 of the Combined Code on Corporate Governance published by the Financial Reporting Council in 2003 (“the Code”) except in relation to the following requirements:

• the requirements for the audit committee and the remuneration committee to comprise of at least three independent non-executive directors, and for the nomination committee to have a majority of independent non-executive directors, were not satisfied until the appointment of Penny Hughes on 11 December 2006 (sections B.2.1, C.3.1 and A.4.1 of the Code). The appointment of Oliver Stocken to the remuneration committee in November 2006 complied with the revised version of the Code published in June 2006 but not the Code that applied in respect of the period under review; and
  
  
• given the limited period since the demerger in October 2006, a full evaluation of the performance of the Board, its committees and its individual directors and the Chairman has not yet been conducted (section A.6.1 of the Code). It is intended that such evaluations and meetings will take place during the current financial year.

The Company has fully complied with the remainder of the Code during the period under review by applying its principles as follows.

The Board

The Board consists of the chairman – Oliver Stocken, chief executive – Terry Duddy, finance director – Richard Ashton, and three nonexecutive directors: John Coombe (the senior independent director), Andy Hornby and Penny Hughes. The biographical details of the directors are shown in the introduction to the Directors' Report.

The three non-executive directors are all determined by the Board to be independent and there are no relationships or circumstances which could affect, or appear to affect, a non-executive director’s judgement. They are appointed for three-year renewable terms. The Board is satisfied that the chairman’s other Board appointments and commitments do not place constraints on his ability to fulfil properly his role as chairman of Home Retail Group. The chairman maintains an office at Home Retail Group’s registered office in Milton Keynes and is available as needed to carry out his responsibilities.

The Board has six scheduled meetings each year and meets more frequently, as required. Following incorporation of the Company for the purposes of the demerger, the Board met on five occasions during the period under review. The time commitment expected of non-executive directors is not restricted to meetings of the Board and Board committees (as defined below). They are available for consultation on specific issues related to their particular fields of expertise and additional time is spent visiting the Group’s businesses and stores and meeting informally with the chairman, executive directors, and senior management.

There is a formal schedule of matters specifically reserved to the Board. The Board has responsibility for:

• the overall management of the Group, approval of the Group’s long term objectives and commercial strategy, and the review of performance, ensuring that any necessary corrective action is taken;
  
  
• the approval of preliminary announcements of interim and final results, including dividends, and the Annual Report and accounts, including the corporate governance statement, remuneration report and statement on internal controls;
  
  
• the approval of documentation to be put forward to shareholders at general meeting, all circulars and prospectuses other than routine documents;
  
  
• the approval of all appointments to the Board and of the company secretary following recommendations by the nomination committee, ensuring adequate succession planning for the Board and senior management, and approving the terms of reference of the Board committees (as defined below). It has approved the appointment of John Coombe as senior independent director and has determined the independence of the other non-executive directors; and
  
  
• determining the responsibilities of the chairman and of the chief executive.

The chairman is responsible for the leadership of the Board and ensuring its effectiveness, for effective communication with shareholders and for facilitating the effective contribution of the non-executive directors and their constructive relationship with the executive directors.

The chief executive is responsible for the day-to-day business of the Group, and is supported by the Operating Board which includes the finance director and the managing directors of the main businesses and shared services functions (members of the Operating Board are shown in the introduction to the Directors' Report). Members of the Operating Board meet informally with the chairman and non-executive directors and regularly attend and present at board meetings when relevant agenda items are under consideration.

There is in place a procedure under which the directors, in furtherance of their duties, are able to take independent professional advice, if necessary, at the Company’s expense. The company secretary, who has been appointed by the Board, is responsible for advising the Board on all corporate governance matters and for ensuring that board procedures are followed and all directors have access to this professional advice.

All directors received briefings from the Company’s legal advisers on their responsibilities at the time of demerger. Each of the non-executive directors undertook a programme of meetings with senior management and store and site visits. Penny Hughes has undergone a customised induction programme since her appointment to the Board in December 2006, taking into account her particular experience and background. This programme included meetings with all members of the Operating Board, other members of senior management, detailed information on the Group and its activities, and store visits.

All directors are subject to re-election by shareholders at the first opportunity after their appointment and, thereafter, in accordance with the Company’s articles of association. All directors will be required to submit themselves for re-election at least once every three years. All directors, being appointed within the last year, will be eligible for re-election at the Annual General Meeting to be held on 3 July 2007.

As indicated earlier, the non-executive directors are appointed for specified terms, each currently being in their first three year term. The letters of appointment for non-executive directors, including the chairman, are available for inspection by any person at the Company’s registered office during normal business hours and at the Annual General Meeting (for 15 minutes prior to the meeting and during the meeting).

Board committees

The Board has appointed the following principal committees: remuneration committee, nomination committee and audit committee (“the Board committees”). The terms of reference of each of these committees are available on the Company’s website www.homeretailgroup.com. In order to facilitate better communication with Board members and the provision of information to the Board, all independent non-executive directors serve on each of the Board committees.

The attendance of directors at meetings of the Board and the Board committees was as follows:

Notes:

1. Two of the meetings of the remuneration committee that Oliver Stocken attended were prior to his appointment to the committee. Oliver Stocken is not a member of the audit committee.
   
   
2. Terry Duddy and Richard Ashton are not members of the audit committee or the remuneration committee.
   
   
3. Penny Hughes was appointed to the Board and the Board committees on 11 December 2006.

There were no formal meetings of the nomination committee during the period under review. The appointment of Penny Hughes was considered at a Board meeting.

Remuneration committee

The remuneration committee is chaired by Andy Hornby and its other members are John Coombe, Penny Hughes and Oliver Stocken. In accordance with the Code, the committee will meet not less than three times a year. Details of its responsibilities and of compliance with Section B of the Code regarding remuneration are set out in the Directors' Remuneration Report.

Nomination committee

The Board has established a nomination committee to lead the process for Board appointments. The committee is chaired by Oliver Stocken and its other members are John Coombe, Terry Duddy, Andy Hornby and Penny Hughes. The nomination committee will meet not less than twice a year and has responsibility for making recommendations to the Board on the composition of the Board and its committees, on retirements, appointments of additional and replacement directors and ensuring compliance with the Code.

At the time of the demerger, the Board stated that it intended to appoint a further independent non-executive director and external advisers were appointed to facilitate the search for such an individual. The members of the nomination committee discussed the balance of skills, knowledge and experience that would be appropriate for the appointment also taking into account the need to ensure that the appointee would have enough time available to devote to the position. From a range of potential candidates, Penny Hughes was identified as a suitable individual and was appointed by the Board on 11 December 2006.

Audit committee

The audit committee is chaired by John Coombe and its other members are Andy Hornby and Penny Hughes. John Coombe was chief financial officer of GlaxoSmithkline plc and was chairman of the GUS plc audit committee prior to the demerger in October 2006. The Board considers that he has the recent and relevant financial experience required to chair the audit committee. Andy Hornby and Penny Hughes offer a wide range of experience from positions at the highest level of business. Further details of all the members of the audit committee are set out in the Introduction to the Directors' Report.

The audit committee will meet no fewer than three times a year and its principal responsibilities cover internal control and risk management, internal audit, external audit (including auditor independence) and financial reporting. The chairman, chief executive and finance director are normally expected to attend meetings of the committee.

The committee has a structured programme linked to the Group’s financial calendar. During the period under review, the committee undertook the following activities:

• reviewed the preliminary announcement, Annual Report and Financial Statements and the interim announcement and considered reports from the external auditors identifying any accounting or judgemental issues requiring its attention;
  
  
• reviewed the statement in the Annual Report on the system of internal control;
  
  
• reviewed and approved audit plans for the external and internal auditors;
  
  
• considered quarterly reports from the head of internal audit on the results of internal audit reviews, significant findings, management action plans and timeliness of resolution;
  
  
• reviewed reports on the Group’s risk management process and risk profile;
  
  
• reviewed presentations on risk and its identification, management and control with senior management;
  
  
• reviewed, at each scheduled meeting, a report on any material litigation involving Group companies;
  
  
• reviewed management of fraud risk and incidences of fraud; and
  
  
• reviewed arrangements by which Group employees may, in confidence, raise concerns about possible improprieties in financial reporting, dishonesty, corruption, breaches of business principles and other matters.

One of the primary responsibilities of the audit committee is to make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditors. A number of factors were taken into account by the committee in assessing whether to recommend the external auditors for re-appointment. These include:

• the quality of reports provided to the audit committee and the Board and the quality of advice given;
  
  
• the level of understanding demonstrated of the Group’s businesses and the retail sector; and
  
  
• the objectivity of the external auditors’ views on the controls around the Group.

The audit committee recognises that auditor independence is an essential part of the audit framework and the assurance it provides. Audit fees paid to the Company’s auditors, PricewaterhouseCoopers LLP, in respect of the period under review, exceeded non-audit fees. The audit committee has established control procedures to safeguard the objectivity and independence of the external auditors and to ensure that the independence of the audit work undertaken by the external auditors is not compromised.

The committee has established a policy covering the type of non-audit work that can be assigned to the external auditors. The auditors may only provide such services provided that these do not conflict with their statutory responsibilities and ethical guidance. These services are:

• further assurance services – where the external auditors’ knowledge of the Group’s affairs means that they may be best placed to carry out such work. This may include, but is not restricted to, shareholder and other circulars, regulatory reports and work in connection with acquisitions and divestments;
  
  
• taxation services – where the external auditors’ knowledge of the Group’s affairs may provide significant advantages to the Group’s tax position and where this is not the case, the work is put out to tender;
  
  
• general – in other circumstances, the external auditors may provide services, provided that proposed assignments which exceed financial limits set out in the policy are put out to tender and decisions to award work are taken on the basis of demonstrable competence and cost effectiveness.

However, certain areas of work are specifically prohibited, including work related to accounting records and Financial Statements that will ultimately be subject to external audit and management of, or significant involvement in, internal audit services.

The committee chairman’s pre-approval is required before the Company uses non-audit services that exceed financial limits set out in the policy.

The committee receives half-yearly reports providing details of assignments and related fees carried out by the external auditors in addition to their normal work. Fees in respect of such assignments carried out in the period under review were:

Accountability and audit

The Board acknowledges that it is responsible for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide reasonable, but not absolute, assurance against material misstatement or loss. The Board has reviewed the effectiveness of the key procedures which have been established to provide internal control.

The Board confirms that the Company has in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group including risks relating to environmental, social and governance matters. This process was in place throughout the period under review and up to the date of approval of the Annual Report and meets the requirements of the guidance entitled “Internal Control: Guidance for Directors on the Combined Code” issued by the Institute of Chartered Accountants in England and Wales in 1999. The audit committee has kept under review the effectiveness of this system of internal control and has reported regularly to the Board.

As part of the process that the Company has in place to review the effectiveness of the internal control system, there are procedures designed to capture and evaluate failings and weaknesses, and in the case of those categorised by the Board as significant, procedures exist to ensure that necessary action is taken to remedy the failings.

The key procedures which were operational in the period under review were as follows:

• the Group’s risk factors were reviewed with its advisers as part of the demerger process and were published in the prospectus;
  
  
• risks were reviewed by management and updated as part of a bi-annual process. The risks identified were then reviewed by a risk committee chaired by the finance director and comprising of all divisional finance directors and the company secretary. The head of internal audit also attended its meetings;
  
  
• those risks classified as high level risks by the risk committee were then reported to the Operating Board and audit committee. The schedule of high level risks was used as the basis for a programme of internal audit and assurance;
  
  
• the audit committee has delegated responsibility from the Board for considering operational, financial and compliance risks on a regular basis and received its Annual Report on the controls over these risks. This included risks arising from environmental, social and governance matters.

• the Group has established procedures for delegating authority which ensures that decisions that are significant, either because of the value or the impact on other parts of the Group, are taken at an appropriate level;
  
  
• the Group has implemented appropriate strategies to deal with each significant risk that has been identified. These strategies include internal controls, insurance and specialised treasury instruments;
  
  
• the Group sets out principles, policies and standards to be adhered to. These include risk identification, management and reporting standards, ethical principles and practice and accounting policies.

• the Group has a comprehensive system of budgetary control including monthly performance reviews by the Operating Board. The Operating Board also reviews a range of financial and non-financial performance indicators. These indicators were regularly reviewed to ensure that they remain relevant and reliable;
  
  
• the Group had whistleblowing procedures in place for employees to report any suspected improprieties.

• a range of procedures was used to monitor the effective application of internal control in the Group, including management assurance through confirmation of compliance with standards, and independent assurance through internal audit reviews and review by specialist third-parties;
  
  
• the internal audit department’s responsibilities include reporting to the audit committee on the effectiveness of internal control systems with a particular focus on those areas identified as being the greatest risk to the Group;
  
  
• follow-up processes were used to ensure there was an appropriate response to changes and developments in risks and the control environment.

Relations with institutional shareholders

The Company recognises the importance of communicating with its shareholders and will do so through a variety of channels including the Annual Report, the Annual General Meeting and the processes described below.

Although the majority of shareholder contact is with the chief executive and the finance director (supported by management specialising in investor relations), it is the responsibility of the Board as a whole, led by the chairman, to ensure that a satisfactory dialogue with shareholders takes place.

As part of the demerger process, a programme of investor meetings was held by the chief executive and finance director. These meetings took place with investors in the UK, the USA and other major financial centres in Europe. Since then, meetings with investors have been held following the interim results announcement. A monthly summary of all important or relevant issues raised by shareholders during the course of meetings and discussions is circulated to the Board and reviewed as appropriate at scheduled Board meetings.

The shareholders have a direct line of communication to the chairman particularly if there are areas for concern, whether it be about performance, strategy or governance. The chairman has written to the Company’s largest shareholders explaining the importance the Board attaches to open communications and confirming his availability to meet with them.

It is proposed to commission independent research by a third party later in 2007 in order to provide the Board with an insight on the views of major shareholders.

All directors, including the chairmen of the audit and remuneration committees, intend to be present at the Annual General Meeting and be available to answer shareholders questions. Voting at the Annual General Meeting will be by way of a poll by members present at the meeting and following each vote the level of proxies lodged on each resolution, the balance for and against the resolution and the number of votes withheld will be displayed. The results of voting at the Annual General Meeting will also be added to the Company’s website as soon as possible after each meeting.

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