Board corporate governance statement

Board composition and independence

The board currently comprises the chairman, six independent non-executive directors and three executive directors. The only changes in the composition of the board during the year were the resignation of Michael Murray as a director and chief financial officer at the end of March 2010 and the appointment of Jeremy Townsend as a director and chief financial officer at the end of August 2010, with our chief executive, Alan Brown, taking board responsibility for financial matters in the intervening months.

The chairman, John McAdam, is not classified as independent. The board regards Peter Long, Peter Bamford, Richard Burrows, Alan Giles, William Rucker and Duncan Tatton-Brown as being independent in all circumstances which are likely to affect, or could appear to affect, their judgement in carrying out their duties as directors.

In the ordinary course, each non-executive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement for a further two terms of three years, subject to the board being satisfied with a director's performance, independence and commitment. Peter Long was appointed in October 2002 and serves as the senior independent director and as chairman of the remuneration committee. He will have served as a director for nine years in October 2011. Peter Long continues to demonstrate independence of mind and an effective challenge to management and most importantly has a detailed knowledge of the challenges facing the company over the next several years. The board is fully supportive of him being re-elected as a director at the annual general meeting in 2011.

The UK corporate governance code, which will apply to the company's next annual report, provides that all directors should submit themselves for re-election on an annual basis and the board has decided that all directors will submit themselves for re-election at the 2011 annual general meeting.

The board has authorised a number of potential conflicts of interest regarding the non-executive directors. These potential conflicts are not material either to the company or, the directors believe, to the other companies that are the subject of the potential conflict. Authorised conflicts are reviewed by the board periodically. The process for authorising potential conflicts is reviewed by the nomination committee and described in the nomination committee report below.

The board's policy is to appoint and retain non-executive directors who can apply their wider knowledge and experience to their understanding of the company's affairs. Appointments to the board are made on the recommendation of the nomination committee following a rigorous selection process. New members of the board receive appropriate training and induction which includes spending time in the company's operations.

The senior independent director, Peter Long, is available to be consulted by shareholders should they have concerns that they are unable to resolve through normal channels. He is also responsible for leading the performance review process in respect of the chairman, further details of which are provided below.

There have been no changes in the board since the year end. The board continues at the date of this report to consist of the chairman, six independent non-executive directors and three non-independent executive directors.

Board effectiveness

The board has a formal schedule of matters specifically reserved for its decision including: strategy, risk evaluation, the review and approval of the financial statements, significant changes in accounting policies, remuneration of the company's auditors (delegated from shareholders), external reporting, approval of the annual operating plan and major transactions and other major capital transactions above the level delegated to the chief executive.

The board held ten meetings in 2010 and one two-day meeting in November to review and update the group's strategic plan. The board has a rolling programme of items for discussion which ensures that all matters reserved for its attention and other key issues are considered by the board at appropriate times. For example, during the year the board was briefed by senior executives on operational priorities and financial performance in operating divisions. The chairman, supported by the company secretary, ensures that the board is kept properly informed and that all matters reserved to it are given appropriate attention. Board papers and other information and resources are provided in sufficient time to allow directors to be properly briefed in advance of meetings.

In 2010, the board visited the group's largest textiles and hygiene business, which is based in France, as part of an ongoing programme through which the board visits operations in the UK and overseas.

Board committees

The board reviewed the terms of reference for the nomination committee, the audit committee and the remuneration committee during the year and a number of relatively minor changes were approved during the board's annual review of its governance procedures and practices. Agendas, papers and minutes of committee meetings are generally provided to all board members for information and comment. Further information on the membership of the committees and their activities as well as directors' attendance is set out on the table below. Copies of the current terms of reference for the principal board committees are available on the company's website, www.rentokil-initial.com or on application to the company secretary.

In addition to the principal board committees (audit, remuneration and nomination) the board operates a number of ad hoc committees dealing with specific matters. The main ad hoc committee being the finance committee which comprises the chairman, the chief executive, the chief financial officer and three non-executive directors with relevant financial experience. The finance committee reviews matters concerning company financing and group treasury policy and makes recommendations to the board on specific financing matters referred to it.

Audit committee

Throughout 2010 the audit committee comprised, Duncan Tatton-Brown, Peter Bamford and William Rucker, all of whom are independent non-executive directors. The committee chairman, Duncan Tatton-Brown and William Rucker are considered by the board to have recent and relevant financial experience, details of which are set out in the Board of directors. The company secretary acts as secretary to the committee. The chairman, chief executive and chief financial officer, the group controller, the director of internal audit and representatives of the company’s auditors attend by invitation. The committee meets routinely four times a year and additionally when necessary and also meets the company’s auditors and director of internal audit without executive directors present. Details of the committee’s responsibilities and activities during the year are set out in the Audit committee report.

Remuneration committee

Throughout 2010 the remuneration committee comprised Peter Long, Richard Burrows and Alan Giles, all of whom are independent non-executive directors. The company secretary acts as secretary to the committee. Advice on remuneration matters is provided to the committee both from the company’s human resources director and independently by Deloitte LLP, who act as independent advisers to the committee. The committee has responsibility for making recommendations to the board on the company’s policy on the remuneration of executive directors and of the senior management population. The committee also considers and determines specific remuneration packages for executive directors and for senior executives reporting to the chief executive. The committee also considers and authorises incentive arrangements for executive directors and senior executives reporting to the chief executive and also considers and authorises any payments on termination of employment and related benefits to those individuals. Further information on the activities of the committee and audited information on directors’ remuneration, benefits and long-term incentive arrangements is provided in the directors’ remuneration report. A resolution to approve the directors’ remuneration report will be proposed at the annual general meeting.

Nomination committee

Throughout the year the nomination committee comprised John McAdam, Peter Long, Duncan Tatton-Brown and Alan Giles. The committee is chaired by John McAdam who, while not an independent director, is considered by the board to be the appropriate person to chair the board’s nomination committee.

The committee has responsibility for considering the size, structure and composition of the board and for reviewing succession planning amongst the senior management population and for reviewing the board’s process for considering and authorising directors’ potential conflicts of interest.

Attendance at meetings

The attendance of directors at board and committee meetings during 2010 is shown in the following table.

Performance evaluation

The evaluation conducted in 2009 concluded that the board and the principal committees were functioning effectively and that individual director performance including that of the chairman was effective. It was agreed that in 2010 the evaluation process would be focused on a more limited range of topics and conducted by external advisers who tailored the information gathering element of the process to the board's specific requirements. The individual director and committee evaluation processes were constructed on the basis recommended by the external advisers. The 2010 report from the external advisers was reviewed by the board.

The report covered the board's composition, expertise, dynamics, support arrangements, oversight of strategy, risk management and control, succession planning and human resource management all in the context of the board's priorities over the coming year. In general the report concluded that the directors had the appropriate range of skills and experience and constituted an effective and unified board. The report noted that the board currently lacked gender diversity and had limited international diversity in its membership although acknowledged that the board contained substantial international operational experience which gave the board the appropriate international reach and experience.

The report also drew out a number of areas where some changes in board and audit committee oversight of the risk management and internal control framework could be improved, on which the chief financial officer was giving attention. The board acknowledged that gender diversity would be an active consideration when changes in the board's composition were next contemplated.

Individual director evaluation showed that the directors, all of whom would be seeking re-election at the annual general meeting in 2011, continued to demonstrate commitment to their roles. The non-executive directors, led by the senior independent director, Peter Long, carried out a performance evaluation of the chairman after taking account of the views of the executive directors. The review concluded that the chairmanship of meetings and the leadership of the board was conducted effectively. The board intends to carry out further performance evaluations on a regular basis.

The directors apply a governance approach that currently complies with the provisions of the Combined Code on Corporate Governance adopted by the Financial Reporting Council in June 2008 ("the Combined Code"). An analysis of compliance is set out below. The company will be adopting the 2010 UK Corporate Governance Code in respect of the 2011 financial year. A copy of the UK corporate governance codes can be obtained from www.frc.org.uk.

The board has delegated to the chief executive the development and execution of strategy as well as the day-to-day management of the group's businesses. The chief executive is supported by the heads of the group's operating divisions and of the finance, human resources and information services functions that together comprise the company's executive board under the chief executive's chairmanship. They meet 5/6 times a year to review performance, priorities and operational actions. In addition, the chief executive and chief financial officer lead monthly and quarterly business performance reviews with local management teams. The group's change programmes are monitored by a programme board chaired by the chief executive. The HR, Finance and IT functions each has a governance structure that oversees the delivery of functional change programmes to drive capability improvements across the group.

The governance process in the business units comprises the application of group and local policies and procedures, management oversight, the analysis and management of risk, all underpinned by the group's values and behaviours. This framework is designed to ensure that decisions are taken at the right time by colleagues with appropriate authority, after considering all relevant factors from commercial to reputational. The group operates through locally constituted and governed legal entities in some 50 countries. Corporate entities are managed in compliance with local law and regulation and under principles set out in the group's code of conduct. The group's internal control framework is described below.

The chief executive has board level responsibility for all corporate responsibility matters. The board and the company's executive board review, at least annually, the group's corporate responsibility performance. The group's corporate responsibility performance is set out in the corporate responsibility report below and more extensively in the group's web-based corporate responsibility report which can be found at www.rentokil-initial.com/corporate-responsibility/reports-and-policies/reports/.

The management of risk

The board has responsibility for evaluating and reviewing the overall level of risk that is inherent in its strategy and for the execution of that strategy and specifically owns the risks attaching to the matters reserved for its own decision. The board reviews the strategic risks facing the group as part of its annual review of strategy and operational risks are reviewed routinely. The principal external risk factor continues to be the economic and competitive environments in the territories in which the company chooses to operate which are routinely considered by the board when reviewing business performance. Collectively, the execution of change programmes and management's capability to deliver change is a key risk and is the subject of regular board review. An assessment of risk is intrinsic to individual decisions concerning investment, organisational changes and commercial issues such as entry into new markets or territories.

The board has delegated to the audit committee the role of assessing the effectiveness of the group's internal control processes as well as reviewing the risk mapping methodology used to identify generic or business specific risks and the management actions taken to mitigate specific risks. This process provides the audit committee with an analysis of the gross and net (after mitigating actions) risk taken by the group. The board makes its assessment of whether the residual risk is acceptable based on this analysis. As an additional analysis of risk, risks have been mapped against the group's five strategic thrusts.

The board also delegates to the audit committee stewardship of the internal and external assurance processes that test the effectiveness of the control and risk mitigation framework. The committee reports on these matters to the board on a regular basis but it remains the board's responsibility to be satisfied with the level of assurance gained over individual risks.

The board gains its confidence over the effectiveness of control processes through regular and transparent management reporting, through the governance processes of the group and from the external and internal assurance processes the output of which is reported to the audit committee and available to the board. As reported elsewhere in this report, failings in the control framework in a small number of businesses have highlighted weaknesses both of capability and systems which have required corrective actions. Lessons learned in individual cases are discussed by the audit committee and reviewed by the board.

Engaging with shareholders

The company places great importance on communications with shareholders, including with employee shareholders, and the chairman, chief executive and chief financial officer make themselves available to shareholders at all appropriate times. The company has a regular dialogue with institutional shareholders through one-to-one and group meetings, formal investor and analyst conference calls as well as ad hoc communications, where appropriate.

Formal presentations are held after full year and half year results, to which investors and sell/buy side analysts are invited. These presentations are web-cast and any investor is able to hear the presentation and related questions and answers via the company's website. Accompanying slide presentations are hosted on the company's website as are recordings of meetings. Conference calls for investors and analysts are hosted after the first and third quarter trading updates, with typical levels of participation in excess of 80 shareholder and analysts. Investor road shows are conducted after full year and interim results, involving extensive investor meetings on each occasion. The chairman and senior independent director are available to attend meetings with investors, as required. The company also provides opportunities for private client investor presentations across the UK.

The company sees the annual general meeting as an important opportunity for all shareholders to engage with the board over performance and other matters on the agenda for the meeting and encourages both private and institutional shareholders to attend.

In 2010, the Chairman led a programme of investor meetings involving the chief executive and chief financial officer and the company secretary for small groups of leading shareholders held principally to have an exchange of views on the evolving corporate governance environment.

The board is briefed on the company's investor relations programme through a comprehensive quarterly report from the head of investor relations (who is responsible for day-to-day communications with shareholders and the financial community) as well as by periodic updates from the chief executive and the chief financial officer. In addition, published broker reports are provided to the board. The company's financial and investor relations advisers also maintain a regular dialogue with major shareholders and reports are provided to the board on investors' views on key issues and management performance following major investor presentations of results.

The company's annual report and other investor presentation material is available to all shareholders via the company's website at www.rentokil-initial.com.

During the year ended 31 December 2010 the company complied with all relevant provisions of the Combined Code. This report and the following committee reports, the directors’ remuneration report and the summary table below together describe how the company applied the main and supporting principles of the Combined Code during the year. An extract of the relevant Combined Code provision is shown in italics. The company’s annual report for 2011 will report on the company’s compliance with the 2010 UK Corporate Governance Code.

Directors and board

Section A1 – the board
"…an effective board …collectively responsible for the success of the company"

The board is responsible to shareholders for the overall direction and control of the company and specifically reserves certain matters for its consideration. The schedule of matters reserved to the board for its own and its committees' decisions covers matters such as strategy; risk appetite; the control environment; major investment decisions; financial reporting; accounting policies and the capital structure. These are set out in governance procedures and practices manual which is reviewed annually. The current schedule of matters reserved formally to the board is available in the "corporate governance" area of the "investor relations" section of the company's website or on application to the company secretary.

The board meets routinely nine times a year and additionally when necessary and follows an agreed formal schedule of matters which are considered at individual meetings. In 2010, the board met on ten occasions. Details of directors' attendance at board and principal committee meetings are set out in this report.

Section A2 – chairman and chief executive
"…clear division of responsibilities"

The role of the chairman, John McAdam, is set out in his letter of appointment and is included in board's governance procedures and practices manual. The chairman's priority is the management of the board whereas the chief executive's priority is the management of the company. The chairman received an award under the 2008 Share Incentive Plan, which was formally approved by shareholders at the time of his appointment. As a consequence of this one-off award, he is not regarded as independent under the provisions of the Combined Code. The chairman's main interests outside the company are set out in his biographical details.

The chief executive has delegated authority from the board to manage the company, subject to the strategic direction of the board. He is also responsible for the achievement of the objectives set by the board and preparing an overall strategy for the company to achieve such objectives and the implementation of the overall strategy decided by the board.

Section A3 – Board balance and independence
"…a balance of executive and non-executive directors (…in particular independent NEDs)"

Information on the balance of the board is set out earlier in this report.

The board regards Peter Long, Peter Bamford, Richard Burrows, Alan Giles, William Rucker and Duncan Tatton-Brown as independent non-executive directors.

The board has appointed Peter Long to act as senior independent director whose main responsibility is to be available to shareholders should they have concerns that they are unable to resolve through normal channels and for leading the performance review process in respect of the chairman.

Section A4 – Appointments to the board
"…formal, rigorous and transparent procedure for the appointment of new directors… expected time commitments of NEDs"

The company's articles of association set out the powers of removal, appointment, election and re-election of directors. The process for nomination to the board and for considering succession planning is set out in the nomination committee's report. The board continues to satisfy itself that the chairman has sufficient time available to devote to his duties. The letters of appointment of the chairman and other non-executive directors set out the expected minimum time commitment to the company, which in general covers days required for meetings plus a further day per meeting for preparation and other training or company related activities.

Section A5 – Information and professional development
"…timely quality information… induction on joining… regular update of skills and knowledge"

Material is provided to the board in a timely manner and in appropriate detail to enable it to discharge its duties and to give appropriate challenge to executive management. In addition, executive directors and senior executives of the company provide such additional information, as is required by the board, on specific business issues or on functional or technical developments that are material to the group's operations as a whole.

The company maintains a director induction programme which operated in 2010 following the appointment of Jeremy Townsend as chief financial officer, through which an extensive familiarisation process was undertaken which included not only briefings on all aspects of the group's operations but also visits to key operational sites and functional locations. The group HR director facilitates the induction process.

The board and its committees are supported by the company secretary who, under the direction of the chairman, advises the board on all governance matters and helps ensure good communication and information flows within the board, including between executive and non-executive directors and between the board and its committees.

Section A6 – Performance evaluation
"formal and rigorous annual valuation of its own performance"

The board and the audit, remuneration and nomination committees complete an annual evaluation of their performance as do the directors of their own performance. In 2010, the evaluation was conducted with the assistance of an external facilitator. The process was initiated by a targeted questionnaire completed by each director giving an assessment of individual performances and the board's functioning as a whole. The results are considered by the board and by each committee during February of each year. As a part of the process, the chairman discusses any issues which arose during the process with each director individually. The chairman also discussed with each director the ongoing professional development needs which might enhance individual performance. The chairman appraises the performance of the chief executive and the senior independent director appraises the performance of the chairman and discusses with the chairman any issues arising from the appraisal process.

Remuneration

Section B1 – the level and make up of remuneration
"levels… sufficient to attract, retain and motivate directors… avoid paying more than is necessary… significant proportion (of remuneration)… to the variable"

The directors' remuneration report sets out the policies and practices which demonstrate the company's implementation of the Code principles and provisions.

Section B2 – Remuneration procedure
"formal and transparent procedure"

The remuneration committee's processes and procedures are described in the directors' remuneration report. The committee meets when required and usually at least four times annually. The remuneration committee's terms of reference which are described in the report are available on the company's website and the report also sets out the terms relating to the appointment and remuneration of non-executive directors.

Accountability and audit

Section C1 – Financial reporting
"present balanced and understandable assessment of… position and prospects"

A report from the audit committee is provided here. It is the audit committee's responsibility to ensure that reporting meets the standards of transparency and balance that are required. A "going concern" statement is provided to shareholders in the directors' report.

Section C2 – Internal control
"sound system of internal control"

The board's statement and commentary on its review of the effectiveness of the group's system of internal control is set out in this report below.

Section C3 – Audit committee and auditors
"formal and transparent arrangements for… (applying) financial reporting and internal control principles"

The role of the audit committee and the conduct of the relation- ship with the auditors is set out in the audit committee report.

Relations with shareholders

Section D1 – Dialogue with institutional shareholders
"dialogue based on mutual understanding of objectives"

The chief executive and chief financial officer hold regular meetings with analysts and institutional shareholders to discuss the company's strategy and financial performance. The board is regularly provided with an analysis of the company's shareholder base and with commentary on market views and sentiment. The chairman, the senior independent director and other nonexecutive directors make themselves available for discussions with shareholders as required by circumstances or as requested by shareholders.

Section D2 – Constructive use of annual general meeting
"use AGM to communicate with investors and encourage their participation"

Shareholders are encouraged to attend the AGM which offers an opportunity for all shareholders to ask questions and provide comments on the company's strategy, the performance of the business and any other matter which is within the scope of the meeting. The company provides electronic proxy voting on resolutions and in 2010 adopted the process of all resolutions being conducted through a poll, giving all shareholders voting by proxy the opportunity to participate in voting on the day of the meeting.

Board internal control statement

The board is responsible for maintaining a sound system of internal controls, including financial, operational and compliance controls and risk management and also for reviewing its effectiveness. To discharge these responsibilities, the board has established the processes necessary to comply with the UK governance regime, including having clear lines of responsibility, documented levels of delegated authority and appropriate operating procedures. This framework represents a continuous process for evaluating and managing the control-related risks the group faces. The process has been in place from the start of 2010 to the date of approval of this report. It has been reviewed by the board and accords with the Turnbull guidance for directors.

The company has in place internal control and risk management systems in relation to its financial reporting process and the processes for the preparation of financial statements. These systems are designed to facilitate the proper collection and recording of financial data in order to give reasonable assurance that transactions are recorded in a way that will allow financial information to be prepared in compliance with all statutory and regulatory requirements.

Business performance is monitored through processes which include the supervision of the group's business operations by executive management, through monthly and quarterly business performance reviews, the results of which are reported to the board on a regular basis. Management and financial information is delivered to the board through a comprehensive financial planning, accounting and reporting process. The monitoring of controls includes financial, operational and compliance controls and risk management processes.

The audit committee assists the board in the performance of its responsibilities by reviewing the board procedures as they relate to internal controls and risk management processes. The committee also considers internal and external auditors' reports on internal control issues and internal control and risk management systems and reports its findings to the board. A report on the activities of the audit committee in 2010 is reported below and further information on the risk management and internal control processes can be found in the financial review on and in the business review.

As reported in 2009 the company is engaged in a process of modernising and standardising its business processes over a three to five-year period which will enhance and improve the control environment by removing many non-standard processes. In addition, the company has introduced a more standard approach towards the management of projects which is being embedded across the group. The calibre of financial management within the group has been strengthened significantly but continues to be an area of focus.

Through the monitoring processes set out above, the board has conducted a review of the effectiveness of the system of internal control during the year ended 31 December 2010. The system is designed to manage, rather than eliminate, risk and can only provide reasonable and not absolute assurance against material misstatement or loss. In that context, the review, in the opinion of the board, indicated that the system overall was satisfactory.

In relation to instances of individual failings in control environments, actions have been or are being taken to remedy identified control weaknesses. The audit committee and the board have received reports from management on individual instances.

Refining the internal control framework is iterative and improvement measures are continually under review.

On behalf of the board,