The Board welcomed the Combined Code which was issued by the Hampel Committee on Corporate Governance in June 1998. The Company complied with all recommendations of the Cadbury Code of Best Practice prior to publication of the Combined Code. In response to the Combined Code, the Company made changes to its corporate governance practice to achieve compliance as noted below.

The Board confirms that the Company has applied the principles of good governance contained in the Combined Code and complied with its best practice provisions as set out below.

The Board
The Board of eight Directors is chaired by a non-Executive Director and is comprised of three non-Executive Directors and five Executive Directors.

All of the non-Executive Directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. The non-Executive Directors are from very different backgrounds and bring with them a wide range of expertise and experience of senior management in other areas of commerce and industry. There is a clear division of responsibility between the Chairman and Chief Executive. Sir Chips Keswick is the senior non-Executive Director after the Chairman and this was confirmed during the year.

One third of the Board retire by rotation at each Annual General Meeting. Following the issue of the report of the Hampel Committee, the Company adopted new Articles of Association at an Extraordinary General Meeting in May 1998. The new Articles require that each Director, including the Chief Executive, stands for re-election at least once every three years.

The Board meets regularly and special meetings are convened as and when matters require urgent consideration. The Board reviews detailed budgets, forecasts and plans for the businesses of the Group on an annual basis. Quarterly meetings of the Board consider detailed financial and management reports on the operational and strategic progress of the Group. There is regular communication between the Company and non-Executive Directors. Any Director is free to obtain independent professional advice at the Company’s expense and all of them have access to the Company Secretary who is a qualified solicitor.

Matters which are reserved to the Board and the extent of the delegated authority of the Executive Directors have been clearly defined by the Board. Managers of operating units are subject to specific limits of authority and, whilst they exercise a high degree of autonomy in day-to-day trading activities, they are subject to the Group’s well established reporting and control disciplines.

Committees of the Board
The Audit Committee consists of all of the non-Executive Directors and is chaired by the Chairman of the Company. It meets at least twice a year and receives reports from the auditor who also attends its meetings when required to so do. The Chief Executive, Finance Director and other Executive Directors are also invited to attend its meetings where the Committee considers that to be appropriate.The Committee had complied with the Combined Code during the year when it considered, inter alia, the scope and cost of the audit, the objectivity of the auditor and the programme of internal financial reviews. The wide-ranging remit of the Committee was reviewed and amended by the Board during 1998 to ensure that it expressly reflected the role of an audit committee as envisaged by the Combined Code.

For non-audit work the Audit Committee reviews the Group policy of selecting the adviser appropriate to the task taking into account location and cost. The Group used a number of advisers for services such as due diligence, consultancy and international tax advice.

The Appointments and Salaries Committee, also chaired by the Chairman of the Company, consists of all of the non-Executive Directors and meets at least four times a year. The Committee’s main responsibilities are to make recommendations to the Board concerning nominations and appointments to the Board and, within the framework approved by the Board, to determine the specific remuneration packages and terms of employment for each of the Executive Directors. The Committee also obtains independent advice and information on comparative remuneration packages and structures where it considers that to be appropriate. The Chief Executive is consulted by the Committee about the remuneration of the other Executive Directors. Following a Board review undertaken during 1998, the remit of the Committee was revised in order to conform with the Combined Code, although the Committee did in practice fulfil the requirements of the Combined Code.

The Executive Committee, chaired by the Chief Executive, comprises all the Executive Directors, and monitors performance and formulates proposals on strategy, policy and resource allocation for consideration by the Board.

Investor relations
The 1998 Annual General Meeting was chaired by Sir Eric Pountain, who is also Chairman of the Audit Committee and the Appointments and Salaries Committee, accompanied by all of the other members of the Board. Each substantially separate issue was put to the Annual General Meeting as an individual motion and the meeting was invited to adopt and approve the financial statements and the Directors’ Report for 1997. The Annual General Meeting is regarded by the Board as an important opportunity to meet and communicate with shareholders.

In line with the Combined Code, for the 1999 Annual General Meeting, the notice was despatched more than twenty working days in advance and the level of proxy votes lodged for and against each resolution will be disclosed at the meeting together with details of any abstentions.

The Company has arranged a dealing service for shareholders with Cazenove & Co. (Contact details are shown on the Shareholder Information page).

In addition to the Annual Report the Company issues an Interim Report to shareholders and has its own website at www.imi.plc.uk on the Internet.

Dialogue is maintained with shareholders and during the year the Executive Directors regularly met with investors.

Going concern
The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore the financial statements have been prepared on a going concern basis.

Internal controls
The Board has overall responsibility for the Group’s system of internal financial control which is designed to safeguard the Group’s assets and maintain proper accounting records which provide reliable financial information.

The key elements of the system of internal financial control, which are carried out through the organisational structure, are:

Business planning - all business units prepare forward plans annually which make projections for the following three years. These plans are considered in detail by Executive Directors and then consolidated for review by the Board as a whole. Performance against plan is continuously monitored by the relevant Executive Director and on a monthly and quarterly basis by the Executive Directors. Reports are consolidated and rolling forecasts are updated for overall quarterly review by the Board.

Accounting Controls - minimum standards for accounting systems and controls are promulgated throughout the Group, which are documented and monitored. Certificated quarterly reports from relevant senior executives are required confirming compliance with Group standards. There is also a centrally managed rolling programme of internal financial reviews which are documented and reported. These are co-ordinated with the external audit process and additional annual reviews of selected subsidiary companies are carried out by Group personnel in conjunction with the external auditors.

Investment appraisal - procedures are set out for appraisal, authorisation and post-investment review of capital investments. The Board reviewed the effectiveness of the system of internal financial control through the monitoring process outlined above. It must be recognised that such a system can provide reasonable but not absolute assurances. We expect to be in a position to report with respect to all aspects of internal control after further guidance for listed companies has been published and, in the meantime, we have satisfied the requirements of the London Stock Exchange by reporting on our review of internal financial control.

Non-Executive Directors’ remuneration
The remuneration of the non-Executive Directors is determined, after reference to external comparisons, by the Board.

Non-Executive Directors do not participate in, or vote on, any discussion relating to their own remuneration, nor do they participate in any bonus, pension or employee share schemes of the Company. No other benefits are provided for the non-Executive Directors and they do not have service contracts. Non-Executive Directors are appointed for an initial period of three years subject to re-election on retirement by rotation or removal under the Company’s Articles of Association. The Chairman receives total remuneration of £75,000 per annum inclusive of an increase of £15,000 during the year, and each of the other non-Executive Directors receives £22,500 per annum.

Executive Directors’ remuneration
The key objectives of the Company’s executive remuneration policy are to provide a competitive remuneration package to attract, motivate, reward and retain individuals of the calibre required, and to align executives’ interests with those of shareholders by relating a significant element of the remuneration package to the Company’s performance. Remuneration comprises salaries, annual performance bonuses, benefits in kind, pension arrangements and participation in an executive share option scheme.

When setting the remuneration of each Executive Director, the Appointments and Salaries Committee takes into account their skills and individual performance and has reference to market rates, as evidenced by comparisons with companies of a similar type, size and complexity, and periodic reports from external consultants. Reviews are carried out annually or when a change of responsibilities occurs. Factors taken into account in determining the package include the international nature of the business and achievement of market and technological leadership positions.

Executive Directors are only permitted to accept external appointments with the consent of the Board, and are normally allowed to retain fees from their external non-executive directorships.

Salaries
Following consideration of comparative review by external consultants all of the Executive Directors’ salaries were increased by the Appointments and Salaries Committee. More recently appointed Executive Directors normally attain the full rate of salary for their position after completing two years in office subject to performance. Accordingly, Mr M J Lamb who was appointed to the Board on 1 August 1996, received an additional increase in salary of £21,000 and Mr T J Slack, who was appointed to the Board on 1 August 1997, received an additional increase of £18,000.

Annual performance bonuses
Executive Directors are awarded annual performance bonuses of up to 30 per cent of salary to encourage profitable growth, dependent upon increasing earnings per share and the achievement of strategic objectives. The challenging performance criteria are set by the Appointments and Salaries Committee. As is the case with the vast majority of the Group’s UK employees, these performance bonuses have always been pensionable under the rules of the IMI Pension Funds.

Benefits
The principal benefits in kind for Executive Directors relate to the provision of a fully expensed motor car, private health care arrangements and, where appropriate, relocation arrangements.

Service contracts
It is the policy of the Company to seek to make all new appointments on the basis of one year service contracts. All of the Executive Directors have one year rolling service contracts except for the two longest serving Executive Directors, Mr G J Allen and Mr N C Paul, who have two year service contracts. These long-serving directors voluntarily and without compensation agreed to reduce the three year notice entitlement established on their original appointment as Executive Directors. The Board believes it has taken reasonable steps to reduce notice periods.

Summary of Directors’ remuneration

*In addition, £200,000 was paid in 1997 to Mr A L Emson as compensation for loss of office.
Salaries shown above for non-Executive Directors include fees of £30,000 (1997: £30,000).

An immediate pension based on service completed may be drawn on retirement after age 50, subject to certain service requirements and, if retirement precedes age 57, to a reduction if retirement is at the member’s request. On death in service, in addition to a dependant’s pension of two-thirds of the member’s pension based on prospective service, a lump sum of four years pensionable pay is normally payable. Children’s pensions are also paid in the event of death. An immediate pension based on prospective service is payable if ill-health forces retirement. Once in payment pensions are normally increased in line with price inflation although the guaranteed annual increase under the Fund is limited to 5 per cent. No contributions are payable by members of this Fund.

Details of the pension benefits earned during 1998 are summarised in the following table. This shows the Directors' accrued pension benefits at the end of the year, and represents the annual deferred pension to which the Director would have been entitled had he left service at the end of the year. This is based on completed service and earnings at the relevant date. Also shown is the increase in the accrued pension during the year, over and above the effects of inflation, which reflects the completion of further pensionable service and any increase in salary.

*Includes a transfer credit from a previous employer's scheme.
The above figures exclude any benefits from the Executive Directors’ voluntary contributions.
Non-Executive Directors are not members of any Group pension scheme.

Share schemes
During the year further grants of options were made under the IMI Executive Share Option (1995) Scheme. The options are subject to performance-related conditions so that they only become exercisable if growth in earnings per share during any three consecutive financial years exceeds the rate of increase in the UK Retail Price Index over that three year period by at least 6 per cent. The grant of options is being phased over a period of years as the Appointments and Salaries Committee does not favour block grants of the maximum entitlement in any one year. The Scheme is available to all senior executives and options are priced at full market value without discount.

The Company operates an Inland Revenue approved savings-related share option scheme which is open to most of the Group’s UK employees, including the Executive Directors, and grants options to all participants at a discount of up to 20 per cent below the market price.

The Executive Directors also participate in an employees’ profit sharing scheme covering most UK employees but, whereas employees may take up their entitlement in cash or shares, Executive Directors are required to take their entitlement in the form of shares.

Directors’ share options
Directors’ share options outstanding at 31 December 1998 were as follows:

Please refer to note 20 for the respective scheme codes

Directors’ interests
The interests (all being beneficial) of the Directors and their families in the share and loan capital of the Company are shown below, together with their interests in options granted to them pursuant to the rules of the IMI Savings-Related Share Option Schemes (marked a) and the rules of the IMI Executive Share Option (1985) Scheme (marked b) and the rules of the IMI Executive Share Option (1995) Scheme (marked c).

During the period 31 December 1998 to 8 March 1999 there were no changes in the interests of any current Director from those shown save that on 7 January 1999 Sir Eric Pountain purchased 5,000 ordinary shares at a price of 224p per share and on the same date Mr M J Lamb purchased 4,000 ordinary shares at a price of 226p per share.

The closing price of the Company’s ordinary shares at 31 December 1998 was 237.5p per share and the price range during the year was 234p to 532p.

The notional gains made by the Directors on the exercise of share options during the year were: Mr N C Paul £2,230; Mr T J Slack £3,357; which in aggregate amounted to £5,587 although the relevant shares were retained.