Compliance with the Combined Code
The Company continues to be committed to the principles of corporate governance contained in the Combined Code for which the Board is accountable. In the year ended 31 December 2006 a number of changes to the Group Board had an impact on the Board’s full compliance with the code.

Board changes in the year:

• Rod Aldridge stepped down as Executive Chairman to Non-Executive Chairman in March 2006 and retired from the Board on 31 July 2006
• Eric Walters was appointed as Non-Executive Chairman with effect from 1 August 2006
• Simon Pilling was promoted to become an Executive Director of the Group Board, having previously been a member of the Divisional Executive Board, with effect from 1 August 2006
• Bill Grimsey was appointed as Non-Executive Director with effect from 9 October 2006.

For each appointment, the Board undertook a formal and rigorous recruitment process, led by the Nomination Committee and, where appropriate, with the assistance of independent external search consultants.

The Group has complied throughout the year with the provisions of Section 1 of the Combined Code except in 2 circumstances; in respect of the independence of the Board and in respect of the number of independent non-executive directors on the Audit and Remuneration Committees between 1 August to 9 October 2006, as follows:

• Independence of the Board (A.3.2) – following the retirement of Rod Aldridge as Non-Executive Chairman on 31 July 2006, Eric Walters was appointed as Non-Executive Chairman to the Board (a Non-Executive Director of The Capita Group Plc since January 2001) with effect from 1 August 2006 and on 9 October 2006, Bill Grimsey was appointed as a Non-Executive Director of the Board. We recognise that with 4 Executive Directors, excluding the Non-Executive Chairman, the Board does not fully comply with the Combined Code regarding the balance of the Board. However, the Board believes that the current composition of the Board is more in line with the principles of the code as it is led by a Non-Executive Chairman and its composition remains suitable for the nature and size of the Group. We believe that the collective skills, experience and approach to running the business is appropriate for driving the Group forward and achieving the Group’s goals. We constantly review the composition of the Board to ensure that it continues to meet the needs of the Group.
  
  
• The Code recommends 3 independent Non-Executive Directors be appointed to the Audit Committee (C.3.1) and the Remuneration Committee (B.2.1). Eric Walters had served on both committees. Therefore, following his appointment as the Group’s Chairman, both committees comprised of 2 Non-Executive Directors for the period from 1 August to 9October 2006.This position was resolved with the appointment of Bill Grimsey to the Audit Committee and Remuneration Committee on 9 October 2006. However, the Audit Committee did not meet during this period.
  
  

The Board’s Non-Executive Directors, Peter Cawdron, Eric Walters, Martina King and Bill Grimsey are regarded as independent and free from any business or other relationship that could materially interfere with their judgment.

For the purposes of the Combined Code, Peter Cawdron has served on the Board for 9 years. The Board is satisfied that Peter Cawdron remains independent with strong financial skills and a good knowledge of the business and its sectors and continues to enhance the overall balance of the Board.

Board responsibilities and effectiveness
The Board is collectively responsible to shareholders for setting the direction of the business and monitoring the Group’s ongoing affairs. It is also responsible for ensuring an effective internal control environment that identifies and manages appropriately the risks associated with the business pages.

The Board demonstrates its commitment to the strategic direction and control of the Group by scheduling a series of meetings in the year. It can meet as necessary outside of this schedule to consider any urgent matters that may arise. It sets the strategic objectives of the Group, ensuring sufficient financial and human resources are in place to meet those aims. The Board sets the Group’s values and standards and ensures that its obligations to clients, employees, suppliers, the community and other key stake holders are understood and met. The Board has a formal schedule of matters specifically reserved to it for decision including the Group’s business strategy, annual budget, annual and interim financial results, dividends and major corporate activities. The Board also considers regular reports from the Chief Executive, Group Finance Director and Joint Chief Operating Officers. The Board is provided with complete, timely and relevant information to ensure that informed judgements are made in pursuit of the Group’s objectives.

The Board also reviews the performance of management in meeting business objectives, plans the succession of key executives, and determines appropriate remuneration levels through the Remuneration Committee, a committee of the Board. The operational management of the Group is delegated to the Divisional Executive Board, which meets monthly. Its composition is set out in the Divisional Executive board section.

The Non-Executive Directors have a particular responsibility to challenge constructively and independently the business development plans that are proposed by executive management and monitor the performance of the management teams in the delivery of agreed business objectives and targets. The Non-Executive Chairman encourages and engages in an open dialogue with Non-Executive Directors in particular, who are at liberty to meet with him as a group or individually as they feel fit, without the presence of Executive Directors. Directors and officer’s liability insurance is maintained.

Board composition
The Directors acknowledge the need to segregate the responsibility for operating the Board from the management of the underlying business. Consequently, the roles of Non-Executive Chairman (Eric Walters) and Chief Executive (Paul Pindar) are separated.

The Board consists of the Non-Executive Chairman, Eric Walters; 3 further independent Non-Executive Directors, Peter Cawdron (Senior Independent Director), Martina King and Bill Grimsey, 4 Executive Directors; Paul Pindar, Chief Executive, Gordon Hurst, Group Finance Director and Company Secretary and Paddy Doyle and Simon Pilling, Joint Chief Operating Officers.

The Senior Independent Non-Executive Director is available, as necessary, to lead meetings of the Non-Executive Directors without the Executive Directors and/or the Chairman being present and meet with shareholders to understand any concerns. Biographies of the Directors can be found on pages Group board and Divisional Executive board.

Director induction and professional development
Simon Pilling received an appropriate induction programme on joining the Group Board. Bill Grimsey received a comprehensive induction programme involving appropriate documentation, meetings and visits to Capita businesses with other Directors, attendance at Divisional Board meetings and discussions with advisers and senior management from across the Group.

All Board members have access to independent advice on any matters relating to their responsibilities as Directors and as members of the various committees of the Board, at the Group’s expense. The Company Secretary, Gordon Hurst, who is also Group Finance Director, is available to all Directors and he is responsible for ensuring that all Group Board procedures are complied with.

The decision to combine the roles of Finance Director and Company Secretary was taken when Capita was a smaller entity and as the Group has evolved this approach has been regularly reviewed and has proven to work well. Capita owns a company secretarial business that provides services to numerous private and quoted companies and a team from this business directly supports Gordon Hurst in his role as Company Secretary.

During the year, the Directors received appropriate ongoing briefings and information, including updates on governance and regulatory issues, to enable them to perform their roles. They also attended external courses where appropriate.

Board performance evaluation
At the January 2007 Board meeting the Board reviewed the report from the board performance evaluation process carried out for 2006, the outcome of which was positive.

The various Committees repeated the self-assessment exercise carried out last year in order to assess whether their terms of reference had been satisfactorily fulfilled and how their processes and methods could be improved.

The performance of individual Executive Directors is appraised annually by the Chief Executive, to whom they report. The performance of the Chairman is reviewed by the Non-Executive Directors, led by Peter Cawdron, taking into account the views of the Executive Directors. The performance review of the Chief Executive is conducted by the Non-Executive Chairman, taking into account the views of other Directors. Non-Executive Directors’ performance is reviewed by the Non-Executive
Chairman, taking into account the views of other Directors.