Chairman's Introduction

“We recognise it is critical to constantly review and manage our governance processes to ensure our long-term sustainability.”

Iain Napier Chairman

The current difficulties facing the global economy have brought considerable focus on governance and companies’ remuneration policies. We are confident that our long established and embedded Corporate Governance practices, internal controls and remuneration policy, which in principle comply with the recommendations in the Walker Review, support our strategy of creating sustainable shareholder value and ensure that we remain in a position to deliver this strategy.

Our Corporate Structure Explained

During the year we made considerable progress with the integration of Altadis into our corporate structure. Following this integration we have two main business activities: tobacco and logistics. Our tobacco segment comprises the manufacture, marketing and sale of tobacco and tobacco-related products. Our logistics segment comprises the distribution of tobacco products for major tobacco manufacturers, including Imperial Tobacco, as well as a wide range of non-tobacco products and services.

Both business segments are managed within our Corporate Governance framework and are subject to our policies and control procedures. However, we run our logistics segment on an operationally neutral basis in order to ensure that all its customers are treated equally.

How We Actively Manage Our Business

Our Executive Directors have a wealth of experience in the tobacco industry, complemented and supplemented by the wide range of business and financial experience of our Non-Executive Directors.

They are collectively responsible to our stakeholders for ensuring the Group is managed within its governance framework, setting our corporate strategy and providing an environment in which the corporate strategy can be delivered.

Our corporate strategy is supported by our remuneration policy which focuses on performance related reward, with long-term targets designed to incentivise the creation of sustainable shareholder value. Performance against our corporate strategy is further incentivised by our annual bonus and other performance targets which support our key performance indicators and the management of the key strategic risks of the business.

Managing Risk

The Group faces a number of risks, similar to those faced by many multinational companies, which may impact on our financial position or prevent us from achieving our corporate strategy. Successful management of these risks is fundamental to our sustainable profitability and future growth.

Our business and the risks we face are constantly changing. We, therefore, regularly review our policies and risk management procedures to ensure they are up-to-date and continue to protect our stakeholders.

It is impossible to eliminate every risk. However, through our Risk Co-ordination Committee we analyse risks by reference to the likelihood of them occurring and their potential impact. This ‘top down’ process supports our long established risk management controls embedded across the business. View further information relating to the management of risk during the year.

We also encourage staff to raise concerns they may have including anything they believe to be wrong or dangerous. Our Public Interest Disclosure Policy allows employees to do this safe in the knowledge that they will not suffer any detriment as a consequence.

Succession Planning

We regularly review the composition of the Board and the Chief Executive’s Committee to ensure a continuous provision of the most effective leadership for the Group’s development and sustainability.

Our annual talent review process is designed to identify the most capable successors for critical roles at all levels in our business. It is a bottom up process initiated by our major market management teams and rolled up through our regions and business units. This culminates in a final talent review meeting conducted by the Chief Executive’s Committee, the outputs of which are presented to the Board for review and challenge. This is a practice that is embedded across the Group and seeks to ensure a continuous talent pipeline.

Key Achievements in 2009

As a further step in ensuring our Board structure is aligned with the ongoing international development of our enlarged business, Mrs A J Cooper was appointed to the position of Chief Operating Officer in March 2009.

We made considerable progress with the integration of Altadis, including rolling out our internal controls and Group policies and procedures. In addition, we refined our corporate strategy to ensure we capitalise on the opportunities offered by the enlarged business.

To ensure that maturing financing facilities were effectively managed we successfully raised £3.9 billion through the capital markets and have no refinancing requirements until July 2012.

Key Priorities for 2010

In addition to our ongoing management succession planning, our priorities for 2010 include further consolidation of the Altadis business and the continued embedding and enhancement of our processes and internal controls in the wider Group, including in relation to Occupational Health, Safety and Environmental processes.

We will also focus on further enhancement of our risk management and anti-illicit trade processes.

Our governance processes support and underpin our strategy and its underlying objectives of sales growth, cost optimisation and cash utilisation, and we will continue to drive these during the year. We will also continue to support reasonable regulation of tobacco products but will challenge regulation that undermines the principles of adult choice and the freedom of competition.

Iain Napier
Chairman