48 Pearson plc Annual report and accounts 2010

Board of directors

Chairman Executive directors

Glen Moreno, †• chairman, aged 67, Marjorie Scardino, • chief executive, aged Will Ethridge, chief executive, Pearson was appointed chairman of Pearson 64, joined the Pearson board in January North American Education, aged 59, on 1 October 2005 and is chairman 1997. She trained and practised as a joined the Pearson board in May 2008, of the nomination committee. He was lawyer, and was chief executive of The having held a number of senior positions appointed deputy chairman of from 1993 until joining within , including Financial Reporting Council Limited in Pearson. She is also vice chairman of CEO of the International and Higher November 2010. He is also the senior Corporation and on the boards of Education divisions. He is chairman of independent director of Lloyds Banking several charitable organisations. In 2010 CourseSmart, a publishers’ digital retail Group plc as well as a non-executive she was named a fellow of the American consortium and chairman of the director of Fidelity International Limited. Academy of Arts and Sciences. Association of American Publishers. He was previously the senior independent director of Man Group plc and acting chairman of UK Financial Investments Limited, the company set up by HM Treasury to manage the government’s shareholdings in UK banks.

Non-executive directors

David Arculus, *†• aged 64, is a Patrick Cescau, *†• aged 62, is the senior Susan Fuhrman, *• aged 66, is president of non-executive director of Telefónica S.A. independent director of Tesco plc and a Teachers College at Columbia University, He is also chairman of Numis director of INSEAD, the Business School America’s oldest and largest graduate Corporation plc and in October 2010 for the World. In September 2010, he school of education and president of the was appointed chairman of Aldermore joined the board of IAG, the International National Academy of Education. She was Bank plc. His previous roles include Consolidated Airlines Group, S.A. He previously dean of the Graduate School chairman of O2 plc, Severn Trent plc and was previously group chief executive of of Education at the University of IPC Group, chief operating officer of Unilever. He became a non-executive Pennsylvania and on the board of United Business Media plc and group director of Pearson in April 2002 trustees of the Carnegie Foundation managing director of EMAP plc. He and senior independent director for the Advancement of Teaching. became a non-executive director of in April 2010. She became a non-executive director Pearson in February 2006 and is chairman of Pearson in July 2004. of the remuneration committee. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 49 chairmanand chief hePenguin Group, T JohnMakinson, executiveof aged 56,joined the Pearson board in Marchand was 1996 finance director until June2002. He was appointed chairman of ThePenguin Group in May 2001. He is alsochairman ofThe Royal National Theatreand trustee ofthe Institute for PublicPolicy Research. Themembers ofthe board as at 31 Decembertogether 2010, with their biographicaldetails, are shown on thesepages. Asmatter a ofboard policy, Pearson shareholdershave the opportunity to re-electall board directors each year at thecompany’s Annual General Meeting (this on 28April year, 2011). The chairmanbelieves that the contributionand performance ofeach of thedirectors continues to be valuable andeffective and it is appropriate for themto continue to serve as directors of thecompany. Detailsofdirectors’ remuneration, interestsand dealings in ordinary shares andoptions ofthe company are containedin the report on directors’ remunerationon pages 63to 86. Details ofdirectors’ service agreements canbe found on pagesand 75. 74

Governance Section5 chieffinancial officer,

obinFreestone, A member A ofthe remuneration committee. A member A ofthe nomination committee. aged52, joined Pearson in 2004 as deputychief financial officerand became chieffinancial officerin June 2006, when wasjoinedPearsonthe alsoboard.He he previouslygroup financial controller of Amershamplc part (now ofGE). He qualified a chartered as accountant withRossDeloitte). Touche (now He is alsoa non-executive director and foundershareholder ofeChem Limited. R A member A ofthe audit committee. * * † • imesGroup, T aged 66, non-is a chairmanand chief heFinancial T *†• onaFairhead, executivedirector ofReckitt Benckiser Groupplc, Royal Berkshire NHS Foundationplc. Trust and Tesco He was previouslyfinancial directorVodafone of Groupplc and ofsubsidiaries ofRacal Electronics.He became non-executive a directorofPearson in February 2006 and ischairman ofthe audit committee. Ken Hydon, Ken executiveof aged 49, joined aged49, the Pearson board in June 2002as chief financial officer.She was appointedchief executive ofThe Financial TimesGroup in June 2006 and became responsiblefor Pearson VUE in March 2008.until From she1996 2001, served asexecutive vice president, group control andstrategy ICI.at She is also a non-executivedirector HSBCof Holdings plcand chairs the HSBC audit and risk committees.In December she was 2010 appointedas non-executive a director of TheCabinet Office. R Executivedirectors Non-executivedirectors 50 Pearson plc Annual report and accounts 2010

Board governance

Corporate governance His role includes being available to shareholders if they should have concerns that have not been addressed Introduction through the normal channels, and attending meetings The Pearson board believes that good corporate with shareholders in order to gain a balanced governance supports good performance and the understanding of any concerns that they might have. long-term development of strategy. It believes that The senior independent director also meets with the robust, open board debate over major business issues non-executive directors at least once a year in order brings a discipline to important decisions and adds a to appraise the performance of the chairman, and valuable and diverse set of external perspectives. would be expected to chair the nomination committee The board believes that during 2010 the company in the event that it was considering succession to was in full compliance with section 1 of the Combined the role of chairman of the board. Code 2008 (the Code) with the exception of its ratio of independent non-executive directors to executive Independence of directors directors. Following the resignation of Terry Burns and The board reviews the independence of each of the untimely death of CK Prahalad in April last year, the non-executive directors annually. This includes there was an imbalance of executive and non-executive reviewing their external appointments and any directors on the board for a short period of time. potential conflicts of interest as well as assessing However, effective 1 March 2011, Joshua Lewis their individual circumstances. was appointed to the board as an independent All of the non-executive directors were considered by non-executive director and upon appointment joined the board to be independent for the purposes of the the nomination committee and audit committee. Code during the year ended 31 December 2010. The board embraces the Code’s underlying principles with regard to board balance and the nomination Conflicts of interest committee, led by the chairman, is actively seeking an Since October 2008, directors have had a statutory additional suitable candidate who possesses the right duty under the Companies Act 2006 (the Act) to avoid mix of knowledge, skills and experience to enhance conflicts of interest with the company. As permitted debate and decision-making. A detailed account of the by the Act, the company adopted new Articles of provisions of the Code can be found on the company Association at its AGM in 2008 to allow the directors website at www.pearson.com/investors/shareholder- to authorise conflicts of interest. The company has information/governance established a procedure to identify actual and potential conflicts of interest, including all directorships or Composition of the board other appointments to companies which are not part The board currently consists of the chairman, Glen of the Pearson Group and which could give rise to Moreno, five executive directors including the chief actual or potential conflicts of interest. Such conflicts executive, Marjorie Scardino, and five independent are then considered for authorisation by the board. non-executive directors. The relevant director cannot vote on an authorisation Chairman resolution, or be counted in the quorum, in relation to As stated in his biography, the chairman was appointed the resolution relating to his/her conflict or potential as deputy chairman of the Financial Reporting Council conflict. The board reviews any authorisations granted Limited on 18 November 2010. Both the chairman and on an annual basis. the board are confident that he can fulfil this new role without reducing his time commitment to Pearson. Board meetings Senior independent director The board meets six times a year, each meeting taking Patrick Cescau was appointed senior independent place over two days, and at other times as appropriate. director last year following the retirement of Terry In recent years, we have developed our board meeting Burns. The board believes that Patrick’s extensive agenda to ensure that board discussion and debate is knowledge of Pearson together with his broad centred on the key strategic issues facing the company. commercial experience, make him highly suitable for Over the course of 2010 the major items covered by this appointment. Although he is approaching nine the board included: years of service, the board continues to consider him to be independent. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 51 3 3 3 1 3 3 3 1 n o meetings nd committee Nomination o (maximum3) L n o 4 4 2 2 3 r 2010, r nd as o L x meetings committee Te , , emuneration (maximum4) ecembe R n ti s 3 4 4 4 10 D 10 Audit 23 July2010, and meetings 9 9 : committee and r 2010, r Au (maximum4) an be 22 : Pl to 6 6 6 4 6 5 6 2 6 6 5 1 c i Oc eg Board t mance 8 8 a meetings or f (maximum6) and Str r e 7 7 Governance P y: and

eg e l t ness p i a s o e Strategic plan 2011 to2013 Strategicplan 2011 ReviewAssessment of and Information business AcquisitionCTI of Education Group Reviewaudit, of remuneration and nomination committeeterms reference of AcquisitionTutorVista of Reviewstanding of committee terms reference of Peopleand business strategies Risk Interimresults Post-acquisitionreviews AcquisitionStreet Wall of Institute AcquisitionAmerica’s of Choice Str P Section5 Bu › › › › › › › › › › › › › › › › › › › › › › › › y se r n e J o ew nd o L r,N e iv R

e n l ry 2010, ry o a nd ru add o eb L r S r 26F Uppe ril2010, and p 2010, 25 : : ne 30 A 11 Ju 11 and mance 29 : or and f r e 10 10 P y: nance eg r t resigned30 April 2010. tooktemporary a leave absenceof due to illness. deceasedApril 16 2010. appointedto the remuneration committee effective 30 April 2010. e

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The following table sets out the attendance of the company’s directors at board and committee meetings during 2010: during meetingscommittee and board directorsat company’s the of attendance the out sets table following The Strategydiscussions (Communications; Corporate responsibility;People; Shared Services; Digital) AcquisitionSistema of Educacional Brasiliero Reviewnon-executive of directors’ fees FeedbackonAnnual Report Reportonshareholders’ views Boardeffectiveness review AcquisitionMelorio of plc DisposalInteractive of Data Corporation 2009Report and Accounts Operating 2010 plan Risk Annualreview authorised of conflicts DisposalInteractive of Data Corporation ** *** Theboard values the insight itreceives from witnessing first hand our how businesses are run and meeting the operatingteams who run them. heldIt its June board meeting inNew Jersey and its October meeting inTexas, to reviewand discuss the business and strategy itsfor operating companies located there. * Chairman GlenMoreno Str Gov Bu **** Executivedirectors MarjorieScardino WillEthridge RonaFairhead* RobinFreestone JohnMakinson Non-executivedirectors DavidArculus TerryBurns** PatrickCescau*** SusanFuhrman Ken HydonKen CKPrahalad**** › › › › › › › › › › › › › › › › › › › › › › › › › › 52 Pearson plc Annual report and accounts 2010

Board governance continued

The role and business of the board We endeavour to give non-executive directors access to the senior managers of the business via involvement The formal matters reserved for the board’s decision at both formal and informal meetings. In this way and approval include: we hope that the experience and expertise of the ››Determining the company’s strategy in consultation with non-executive directors can be utilised for the benefit management and reviewing performance against it; of the company. At the same time, this practice ››Any decision to cease to operate all or any material enables the non-executive directors to develop an part of the company’s business; understanding of the abilities of senior management which will help them judge the company’s prospects ››Major changes to the company’s corporate structure, and plans for succession. management and control structure or its status as a public limited company; Board evaluation ››Approval of all shareholder circulars, resolutions and corresponding documentation and press releases The board conducts an annual review of its concerning matters decided by the board; effectiveness. For the review of 2010, the board has appointed an external adviser to conduct detailed ››Acquisitions, disposals and capital projects above £15m interviews with all directors to ensure the board is per transaction or project; effectively focused on its agreed priorities: governance; ››All guarantees over £10m; strategy; business performance and people. ››Treasury policies; The outcome and recommendations of this review ››Setting interim dividends, recommending final dividends will be discussed at the April 2011 board meeting. to shareholders and approving financial statements; During the year, we have made progress in a number ››Borrowing powers; of areas which came out of the 2009 board ››Appointment of directors; effectiveness review. In particular, board meetings have been lengthened to take place over two days, ››Appointment and removal of the company secretary; including an informal dinner to give further opportunity ››Ensuring adequate succession planning for the board for constructive debate and discussion of issues raised and senior management; in the board meetings. ››Determining the remuneration of the non-executive During the course of the year the executive directors directors, subject to the Articles of Association and were evaluated by the chief executive on their shareholder approval as appropriate; performance against personal objectives under ››Approving the written division of responsibilities the company’s standard appraisal mechanism. between the chairman and the chief executive and The chairman leads the assessment of the chief approval of the terms of reference of board executive and the senior independent director committees; and conducts a review of the chairman’s performance. ››Reviewing the Group’s overall corporate governance arrangements, including the performance of the board, Directors’ training its committees and individual directors and determining Directors receive a significant bespoke induction the independence of directors. programme and a range of information about Pearson The board receives timely, regular and necessary when they join the board. This includes background financial, management and other information to fulfil its information on Pearson and details of board duties. Directors can obtain independent professional procedures, directors’ responsibilities and various advice, at the company’s expense, in the performance governance-related issues, including procedures for of their duties as directors. All directors have access to dealing in Pearson shares and their legal obligations the advice and services of the company secretary. as directors. The induction also includes a series of meetings with members of the board, presentations regarding the business from senior executives and a briefing on Pearson’s investor relations programme. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 53 www.pearson.com/ Glen Moreno, Marjorie Scardino, David Arculus, Governance NOMINATION COMMITTEE Chairman Members Patrick Cescau, Susan Fuhrman, Ken Hydon and Joshua Lewis The nomination committee meets as and when and as meetscommittee nomination The Therequired. committee primarily monitors the compositionand balance the of board and its committees,and identifies and recommends to the boardthe appointment new directorsof and/or committeemembers. Whenconsidering the appointment new directora of thecommittee reviews the current balance skills of and experiencethe of board. committee, this chairs board the of chairman the Whilst permitted not is he meetingschair to when the beingconsideredappointment is successor his or of duringdiscussionregarding a performance.his the Duringcommittee 2010 met toconsider the appointmentadditional of independent non-executive directorsand toreview succession planning for non-executiveand executive board positions, as well asboard committee assignments. Thecommittee has written terms reference of which clearlysetout its authority and duties. These can be foundonthe company website at investors/shareholder-information/governance Section5 Everyyear the board receives detailed a report on the viewsmajor of institutional shareholders, provided eitherour corporateby brokers orour independentinvestor relations advisers, Makinson Cowell.every At meeting, the directors also receive an analysisthe of shareholder register highlighting any significant movementsownership in or the share price. Boardcommittees Theboard has established three committees: the nominationcommittee, the remuneration committee andthe audit committee. The chairmen and members these of committees are appointed the by board on therecommendation (where appropriate) the of nominationcommittee and inconsultation with each relevantcommittee chairman. Dialoguewith institutional shareholders anextensive have We programme thefor chairman, chiefexecutive, executive directors and senior managerstomeet with institutional shareholders. The chiefexecutive and chief financial officer present tradingupdates five timesyear a and attend regular meetingsthroughout the year with investors both in theUK and around the world. The chairman meets withour principal investors and our advisers throughoutthe year and keeps the board informed of theirviews onstrategy and corporate governance. Thechairman and senior independent director also makethemselves available tomeet significantany shareholderas required. The non-executive directors meetinformally with shareholders both before and afterthe and AGM respond toshareholder queries andrequests as necessary. Directors’indemnities Inaccordance with section the of Companies232 Act 2006the company Act), (the grants anindemnity to all ofits directors. The indemnity relates tocosts incurredthem by indefending civilany orcriminal proceedingsand inconnection with anapplication orsections for reliefand under(4) sections 661(3) the of Act, long so as itisrepaid laternot 1157(1)-(3) thanwhen the outcome becomes final they (i) if: are convictedinthe proceedings; judgement (ii) isgiven againstthem; the or(iii) court refuses togrant the reliefsought. Thecompany has purchased and maintains directors’ andofficers’ insurancecover against certain legal liabilitiesand costs claimsfor inconnection with any actoromission such directorsby and officers in the executiontheir of duties. We supplement We the existing directors’ training programmethrough continuing presentations at board meetingsabout the operations, company’s by holdingboard meetings the at locations operating of companiesandencouraging by the directors tovisit operatingcompanies and local management as and whentheir schedule allows. Directors can also make useexternal of courses. 54 Pearson plc Annual report and accounts 2010

Board governance continued

Role and responsibilities REMUNERATION COMMITTEE The committee has written terms of reference which Chairman David Arculus clearly set out its authority and duties. These are Members David Arculus, Patrick Cescau, Ken Hydon reviewed annually and can be found on the company and Glen Moreno website at www.pearson.com/investors/shareholder- information/governance The remuneration committee has responsibility for The committee has been established by the board determining the remuneration and benefits packages primarily for the purpose of overseeing the accounting, of the executive directors, the chief executives of the financial reporting, internal control and risk management principal operating companies and other members of the processes of the company and the audit of the financial management committee, as well as recommending the statements of the company. chairman’s remuneration to the board for its decision. The committee is responsible for assisting the board’s The committee takes independent advice from oversight of the quality and integrity of the company’s consultants when required. No director takes part external financial reporting and statements and the in any discussion or decision concerning their own company’s accounting policies and practices. remuneration. The committee reports to the full The Group’s internal and external auditors have board and its report on directors’ remuneration, direct access to the committee to raise any matter of which has been considered and adopted by the board, concern and to report on the results of work directed is set out on pages 63 to 86. by the committee. The committee reports to the full The committee met four times during the year, and has board on a regular basis but no less frequently than written terms of reference which clearly set out its at every board meeting immediately following a authority and duties. These can be found on the committee meeting. It also reviews the independence company website at www.pearson.com/investors/ of the external auditors, including the provision of shareholder-information/governance non-audit services (further details of which can be found on page 58), and ensures that there is an During the year, Terry Burns retired from the board appropriate audit relationship. and was replaced on the remuneration committee by Patrick Cescau. External audit Based on management’s recommendations, the AUDIT COMMITTEE committee reviews the proposal to reappoint the Chairman Ken Hydon external auditors. The committee reviewed the Members Ken Hydon, David Arculus, Patrick Cescau, effectiveness and independence of the external Susan Fuhrman and Joshua Lewis auditors during 2010 and remains satisfied that the auditors provide effective independent challenge to management. The committee will continue to review Members the performance of the external auditors on an annual All of the audit committee members are independent basis and will consider their independence and non-executive directors and have financial and/or objectivity, taking account of all appropriate guidelines. related business experience due to the senior positions There are no contractual obligations restricting the they hold or held in other listed or publicly traded committee’s choice of external auditors. In any event, companies and/or similar public organisations. Ken the external auditors are required to rotate the audit Hydon, chairman of the committee, is the company’s partner responsible for the Group audit every five designated financial expert. He is a fellow of the years. The current lead audit partner has been in place Chartered Institute of Management Accountants, for three years. the Association of Chartered Certified Accountants and the Association of Corporate Treasurers. During the year, the committee discussed the planning, He also serves as audit committee chairman for conduct and conclusions of the external audit as Tesco plc, Reckitt Benckiser Group plc and Royal it proceeded. Berkshire NHS Foundation Trust. At the July 2010 audit committee meeting, the The qualifications and experience of the other committee committee discussed and approved the auditors’ group members are detailed on pages 48 and 49. audit plan, in which they identified the following key risks of misstatement of the Group’s financial statements: Introduction Our str ategy Our performance Our impact on society Governance Financial statements 55 Governance raining Theresults their of review the of impairment model, includingconsideration a assumptions key of such as discountrates and perpetuity rates and sensitivities, whichindicated that all cash-generating units had ampleheadroom; and Theoutputs their of controls testing Sarbanes-for section Oxley, 404 reporting purposes and insupport their of financial statements audit. Theauditors also reported tothe committee the misstatementsthat they had found inthe course of theirwork and the committee confirmed that there werenosuch material items remaining unadjusted in thesefinancial statements. T Thecommittee receives regular technical updates as wellas specific or personal training as required. In additiontothe committee’s regular technical updates,training a session was at held inJune 2010 whichPwC updated the committee number ona of relevantaccounting matters and provided briefing a on theUK Bribery Act and changes toUK corporate governancepractice. Meetings Thecommittee met four times during the year with thechief financial of head groupofficer, internal audit, membersthe of senior management team and the externalauditors inattendance. The committee also metregularly inprivate with the external auditors and thehead group of internal audit. The committee membersattended site visits toour businesses in New Jerseyduring and Texas the year and met with seniorfinancial management based there in order to betterunderstand Grouphow policies are embedded inoperations. every At meeting, the committee considered reports onthe activities the of internal audit function, including theresults internal of audits, risk reviews, project assurancereviews, and fraud and whistleblowing reports.The committee also monitored the company’s financial reporting, internalcontrols and risk managementprocedures and considered any significant legal claims and regulatory issues in the contexttheir of impact onfinancial reporting. Specifically, committeethe considered thefollowing mattersduring the course the of year: Theannual report and accounts: preliminary announcementand trading update; TheGroup accounting policies; Section5 › › › › › › › › Theresults their of review acquisition of accounting for allsignificant acquisitions, encompassing assessment of management’svaluations intangible of assets as well as otherpurchase price adjustments; Thework they had done totest management’s assumptionsand estimates inrelation tobalance sheet judgements(encompassing provisions badforand doubtfuldebts and inventory, recoverability of pre-publicationassets and authors’ advances, estimatestax of and pension liabilities) and theyhow hadsatisfied themselves that thesewere reasonable; The work they had conductedrevenue, had they workThe which over includedtargeted procedures businesses at werewhich morecomplexrevenue recognition,considered have to theassessmentas such testingand businesses; Revenuerecognition, specifically in relation to long-termcontract accounting and increasingly to digitalrevenue streams where management assumptionsand estimates are necessary; Accountingacquisitionsfor and disposals inlight of materialtransactions inparticular, valuation in2010, of judgement; significant involves which intangibles acquired balance Key sheet judgements, since small changes in provisioningjudgements methodologyor can have notableimpacts balanceonthe Group’s sheet and incomestatement; and Assessmentgoodwill of and intangible assets for impairmentinthe context current of market conditions,recognising that management judgement is required. Thecommittee also discussed with the auditors the risksfraud of inthe Group and the programme of workthey planned toundertake toaddress the risks theyhad identified to ensure that they did leadnot to a materialmisstatement the of financial statements. This workincluded the evaluation and testing the of owninternal Group’s controls. The auditors explained wherethey planned toobtain direct external evidence. Thecommittee discussed these issues with the auditorsthe at time their of review the of half year interimfinancial statements and again at in July 2010 theconclusion their of audit the of financial statements InDecember thefor year inFebruary 2010, 2011. the committeediscussed with the auditors the status their of work, focusing ontheir work inrelation to internalcontrols. As the auditors concluded their audit,they explained tothe committee: › › › › › › › › › › › › › › 56 Pearson plc Annual report and accounts 2010

Board governance continued

››Compliance with the Combined Code; The Group’s internal control framework covers ››The Form 20-F and related disclosures including the financial, operational and compliance risks. Its main annual Sarbanes-Oxley Act 404 attestation of financial features are described below: reporting internal controls; Board ››Receipt of an external auditors’ report on the Form The board of directors exercises its control through an 20-F and on the year end audit; organisational structure with clearly defined levels of ››Assessment of the effectiveness of the company’s responsibility and authority and appropriate reporting internal control environment; procedures. To maintain effective control over strategic, financial, operational and compliance matters ››Reappointment, remuneration and engagement letter the board meets regularly, and has a formal schedule of of the external auditors; matters that is brought to it, or its duly authorised ››Triennial review of external auditors benchmarking; committees, for attention. Responsibility for ››Review of the interim management statements; monitoring financial management and reporting, ››Review of the effectiveness of the audit committee and internal control and risk management systems has a review of both the internal and external auditors; been delegated to the audit committee by the board. At each meeting, the audit committee considers ››Annual approval of the internal audit mandate; reports from management, internal audit and the ››Compliance with SEC & NYSE requirements including external auditors, with the aim of reviewing the Sarbanes-Oxley; effectiveness of the internal financial and operating ››Review of interim financial statements and control environment of the Group. announcement; Operating company controls ››Approval of external audit policy; The identification and mitigation of major business ››Review of the committee’s terms of reference; risks is the responsibility of Group senior management ››Annual internal audit plan including resourcing of the and operating company management. Each operating internal audit function; company, including the corporate centre, maintains internal controls and procedures appropriate to its ››Review of company risk returns including Social, structure and business environment, whilst complying Ethical and Environmental (SEE) risks; and with Group policies, standards and guidelines. These ››Annual review of treasury policy. controls include those over external financial reporting which are documented and tested in accordance with Internal control and risk management the requirements of section 404 of the Sarbanes- The board of directors has overall responsibility for Oxley Act, which is relevant to our US listing. Pearson’s system of internal control, which is designed Financial reporting to manage, rather than eliminate, the risks facing the There is a comprehensive strategic planning, budgeting Group, safeguard assets and provide reasonable, but and forecasting system with an annual operating plan not absolute, assurance against material financial approved by the board of directors. Monthly financial misstatement or loss. information, including trading results, balance sheets, In accordance with the provisions of the Code, cash flow statements and indebtedness, is reported the directors confirm that they have reviewed the against the corresponding figures for the plan and effectiveness of the Group’s internal control and prior years, with corrective action outlined by the risk management systems. appropriate senior executive. Group senior management meet, on a quarterly basis, with They also confirm that there is an ongoing process operating company management to review their allowing for the identification, evaluation and business and financial performance against plan and management of significant business risks. This ongoing forecast. Major business risks relevant to each process accords with the revised Turnbull Guidance operating company as well as performance against the ‘Internal control: Revised Guidance for Directors on stated financial and strategic objectives are reviewed in the Combined Code’, and was in place throughout these meetings. 2010 and up to the date of approval of this annual report. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 57 , as , soon as they are released, Governance reasurymanagement nsurance Section5 areinplace. Regular reports onthe work group of internalaudit are provided toexecutive management and,via the audit committee, tothe board. Thehead group of internal audit isjointly responsible withthe group legal counsel monitoringfor compliance withour Code Conduct, of and investigating any reportedincidents including fraud allegations. T Thetreasury department operates within policies approvedthe by board and its procedures are reviewedregularly the by audit committee. Major transactionsare authorised outside the department at therequisite level, and there isanappropriate segregationduties. of Frequent reports are made to thechief financial officerand regular reports are preparedthefor audit committee and the board. I Insuranceisprovided through insurance Pearson’s subsidiaryorexternally, depending onthe scale the of riskand the availability inthe cover of external market, withthe objective achieving of the most cost-effective balancebetween insured and uninsured risks. Goingconcern Havingreviewed liquidthe Group’s resources and borrowingand 2012 facilities and 2011 the Group’s cashforecasts, flow the directors believe that the Grouphas adequate resources tocontinue asgoing a concern.For this reason, the financial statements have, asusual, been prepared onthat basis. Information regardingborrowingthe Group’s liabilities and financial riskmanagement on can beandfound 19 innotes 18 to137. pages129 Shareholdercommunication Pearsonhas anextensive programme of communicationwith all its of shareholders large – and small,institutional and private. also makeparticular a We effort communicate to regularlywith our employees, large a majority of whomare shareholders inthe company. We post all companyannouncements onour website, www.pearson.com and majorshareholder presentations are made accessiblevia webcast orconference call. Our website containsdedicated a investor relations section with an extensivearchive past of announcements and presentations,historical financial performance, share pricedata and calendar a events. of alsoIt includes iskmanagement Inparticular, with regard topreparing consolidated accounts,the group financial reporting team operates rigorous a process. This includes up-to-date Group financial policies,formal requirementsfor business unit finance functions, Groupconsolidation reviews and analysismaterial of variances, group finance technical reviews,including the usetechnical of specialists, and reviewand sign-off seniorby finance managers. These controlsare monitored and assessed during the yearthe by group internal audit and group compliancefunctions. Inaddition, the chief executive prepares report a for developments, onkey times year, a theboard, 11 performanceand issues inthe business. R Operatingcompanies undertake formal, semi-annual riskreviews toidentify new orpotentially under- managedrisks. Throughout risk sessionsthe year, facilitatedthe by head group of internal audit are held withoperating company management toidentify the risks key the company faces inachieving its objectives, toassess the probability and impact those of risks and todocument the actions being taken tomanage those risks.The Pearson management committee reviews theoutput these of sessions, focusing onthe significant risksfacing the business. Management has the responsibilitytoconsider and execute appropriate actiontomitigate these risks whenever possible. The resultsthese of reviews are summarised twice a groupyear by internal audit evaluationfor and onward reportingtothe board, insummary, and inmore detail viathe audit committee. Groupinternal audit Thegroup internal audit function isresponsible for providingindependent assurance tomanagement on thedesign and effectiveness of internalcontrols to mitigatefinancial and operational risks. The annual internalaudit plan, derived from risk-based a approach,isapproved the by audit committee. Recommendationstoimprove internal controls and to mitigaterisks, both,or are agreed with operating companymanagement after each audit. Formalfollow-up procedures allow Group internal audittomonitor operating companies’ progress in implementingits recommendations and toresolve any controldeficiencies. The group internal audit function alsohas remit a tomonitor significant Group projects, inconjunction with the central project management office toand provide assurance that appropriate projectgovernance and risk management strategies 58 Pearson plc Annual report and accounts 2010

Board governance continued

information about all of our businesses, links to their Registered auditors websites and details of our corporate responsibility In accordance with section 489 of the Companies Act policies and activities. 2006 a resolution proposing the reappointment of We have an established programme of educational PricewaterhouseCoopers LLP (PwC) as auditors to seminars for our institutional shareholders focusing the company will be proposed at the AGM, at a level on individual parts of Pearson. These seminars of remuneration to be agreed by the directors. are available to all shareholders via webcast on www.pearson.com Auditors’ independence Our AGM – which will be held on 28 April this year – In line with best practice, our relationship with PwC is is an opportunity to meet the company’s managers, governed by our external auditors policy, which is hear presentations about Pearson’s businesses and the reviewed and approved annually by the audit previous year’s results as well as to conduct general committee. The policy establishes procedures to AGM business. ensure the auditors’ independence is not compromised as well as defining those non-audit services that PwC Share capital may or may not provide to Pearson. These allowable services are in accordance with relevant UK and Details of share issues are given in note 27 to the US legislation. accounts on page 149. The company has a single class of shares which is divided into ordinary shares of 25p The audit committee approves all audit and non-audit each. The ordinary shares are in registered form. services provided by PwC. Certain categories of As at 31 December 2010, 812,677,377 ordinary shares allowable non-audit services have been pre-approved were in issue. At the AGM held on 30 April 2010, the by the audit committee subject to the authorities below: company was authorised, subject to certain conditions, ››Pre-approved non-audit services can be authorised by to acquire up to 80 million of its ordinary shares by the chief financial officer up to £100,000 per project, market purchase. Shareholders will be asked to renew subject to a cumulative limit of £500,000 per annum; this authority at the AGM on 28 April 2011. ››Acquisition due diligence services up to £100,000 per Information provided to the company pursuant to transaction; the Financial Services Authority’s Disclosure and ››Tax compliance and related activities up to the greater Transparency Rules is published on a Regulatory of £1,000,000 per annum or 50% of the external audit Information Service and on the company’s website. fee; and As at 25 February 2011, the company had been notified under DTR5 of the following significant voting rights in ››For forward-looking tax planning services we use its shares. the most appropriate adviser, usually after a tender process. Where we decide to use our independent Number of shares Percentage auditors, authority, up to £100,000 per project subject Legal & General Group plc 32,300,784 3.98% to a cumulative limit of £500,000 per annum, has been Libyan Investment delegated by the audit committee to management. Authority 24,431,000 3.01% Services provided by PwC above these limits and all other allowable non-audit services, irrespective of Annual General Meeting (AGM) value, must be approved by the audit committee. Where appropriate, services will be tendered prior The notice convening the AGM to be held at 3 pm to awarding work to the auditors. on Thursday, 28 April 2011 at The Institution of Engineering and Technology, 2 Savoy Place, London In 2007, Interactive Data appointed Ernst & Young LLP WC2R 0BL is contained in a circular to shareholders (Ernst & Young) as its independent auditors. Until July to be dated 24 March 2011. 2010, Interactive Data was part of the Group and therefore, in order to maintain Ernst & Young’s independence we have restricted the services that Ernst & Young can provide to Pearson and its subsidiaries, in a similar way to which we restrict the services that PwC can provide to the company. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 59 Secretary Governance Section5 Thedirectors are responsible thefor maintenance and integritythe of website. company’s Legislation thein UnitedKingdom governing the preparation and disseminationfinancial of statements differmay from legislationinother jurisdictions. Eachthe of directors, whose names and functions are listedconfirm onpages 48and that 49, to the best of theirknowledge and belief: TheGroup financial statements, prepared in accordancewith IFRSs as adopted the give by EU, a trueand fair view the of assets, liabilities, financial positionand profit of the Group company;and and Thedirectors’ report contained inthe annual report includesfair a review the of development and performancethe of business and the position the of companyand Group, together with description a of theprincipal risks and uncertainties that they face. Thedirectors also confirm that,for all directors in officeat the dateof this report: far so as the a) directors are aware, there isno relevantaudit information which of the company’s auditorsare unaware; and they taken have b) all the steps that they ought tohave takenas directors orderin tomake themselves aware relevantany of audit information and toestablish that theauditors company’s are aware that of information. and signed Approvedon the by board March on7 2011 itsbehalf by PhilipHoffman › › › › Selectsuitable accounting policies and then apply them consistently; Makejudgements and accounting estimates that are reasonableand prudent; Statethat the financial statementscomply with IFRSs asadopted the by European Union ordisclose and explainmaterialany departures from those IFRSs; and Preparethe financial statements goinga concernon basis,unless itisinappropriate topresume that the the Group companywill and/or continue inbusiness. Thedirectors are responsible keepingfor adequate accountingrecords that are sufficient to show and explainthe transactions company’s and disclose with reasonableaccuracy timeany at the financial position the of company and the Group. This enables them to ensurethat the financial statements and the report on directors’remuneration comply with the CompaniesAct 2006 and, as regards the Group financial statements, Article of 4 the IASRegulation. They are alsoresponsible safeguardingfor the assets of thecompany and the Group and takingfor reasonable stepsthefor prevention and detection fraud of and otherirregularities. Statementdirectors’ of responsibilities Thedirectors are responsible preparingfor the Annual Report,the Directors’ Remuneration Report and the financial statements accordancein with applicable law andregulations. Companyrequireslaw the directors toprepare financial statementsfor each financial Under year. that thelaw directors prepared have the Group and parent companyfinancial statements accordancein with InternationalFinancial Reporting Standards (IFRSs) as adoptedthe by European Union. Under company thelaw directors must approvenot the financial statementsunless they are satisfied that they give a trueand fair view the of state affairs of of companythe andthe Group and the of profit or loss of the Group thatfor period. Inpreparing these financial statements, the directors arerequired to: Theaudit committee receives regular reports summarisingthe amount fees of paid tothe auditors. full A statement the of fees auditfor and services is providedtoinnotethe 4 accounts onpage 109. › › › › › › › › 60 Pearson plc Annual report and accounts 2010

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Additional information for shareholders Any dividend which has not been claimed for 12 years after it became due for payment will be forfeited and Amendment to Articles of Association will then belong to the company, unless the directors decide otherwise. Any amendments to the Articles of Association (the Articles) of the company may be made in accordance If the company is wound up, the liquidator can, with with the provisions of the Companies Act 2006 (the the sanction of a special resolution passed by the Act) by way of a special resolution. shareholders, divide among the shareholders all or any part of the assets of the company and he/she can value Rights attaching to shares assets and determine how the division shall be carried out as between the members or different classes of The rights attaching to the ordinary shares are defined members. The liquidator can also transfer the whole in the company’s Articles. A shareholder whose name or any part of the assets to trustees upon any trusts appears on the company’s register of members can for the benefit of the members. choose whether his/her shares are evidenced by share certificates (i.e. in certificated form) or held Voting at general meetings electronically (i.e. uncertificated form) in CREST (the electronic settlement system in the UK). Any form of proxy sent by the company to shareholders in relation to any general meeting must be delivered to Subject to any restrictions below, shareholders may the company, whether in written or electronic form, not attend any general meeting of the company and, less than 48 hours before the time appointed for holding on a show of hands, every shareholder (or his/her the meeting or adjourned meeting at which the person representative) who is present at a general meeting named in the appointment proposes to vote. has one vote on each resolution for every ordinary share of which they are the registered holder. No shareholder is, unless the board decides otherwise, A resolution put to the vote at a general meeting is entitled to attend or vote either personally or by proxy decided on a show of hands unless before, or on the at a general meeting or to exercise any other right declaration of the result of, a vote on a show of hands, conferred by being a shareholder if he/she or any a poll is demanded. A poll can be demanded by person with an interest in shares has been sent a the chairman of the meeting, or by at least three notice under section 793 of the Act (which confers shareholders (or their representatives) present in upon public companies the power to require person and having the right to vote, or by any information with respect to interests in their voting shareholders (or their representatives) present in shares) and he/she or any interested person failed to person having at least 10% of the total voting rights supply the company with the information requested of all shareholders, or by any shareholders (or their within 14 days after delivery of that notice. The board representatives) present in person holding ordinary may also decide, where the relevant shareholding shares on which an aggregate sum has been paid up comprises at least 0.25% of the nominal value of the of at least 10% of the total sum paid up on all issued shares of that class, that no dividend is payable ordinary shares. in respect of those default shares and that no transfer of any default shares shall be registered. At this year’s AGM voting will be conducted on a poll. Pearson operates two employee benefit trusts to hold Shareholders can declare a final dividend by passing an shares, pending employees becoming entitled to them ordinary resolution but the amount of the dividend under the company’s employee share plans. There were cannot exceed the amount recommended by the 14,008,555 shares so held as at 31 December 2010. board. The board can pay interim dividends on any Each trust has an independent trustee which has full class of shares of the amounts and on the dates and for discretion in relation to the voting of such shares. the periods they decide, provided the distributable A dividend waiver operates on the shares held in profits of the company justify such payment. these trusts. The board may, if authorised by an ordinary resolution of the shareholders, offer any shareholder the right to elect to receive new ordinary shares, which will be credited as fully paid, instead of their cash dividend. Introduction Our str ategy Our performance Our impact on society Governance Financial statements 61 Governance Section5 Appointmentreplacementand directors of TheArticles contain the following provisions relationin todirectors: Directorsshall number noless than two. Directors beappointedmay the by company ordinary by resolutionthe orby board. director A appointed by theboard shall hold office only until the next AGM and shallthen beeligible reappointment,for but shall not betaken into account indetermining the directors or thenumber directors of who are toretire rotation by that at meeting. The board frommay time totime appointone ormore directors tohold executive office withthe company suchfor period (subject tothe provisionsthe of andAct) upon such terms as the boarddecidemay and revokemay orterminate any appointmentmade. so every At one-thirdthe of AGM company, the of directorsshall iftheir retire number rotation by (or, multiple a is not three, of the number nearest to one-third).The first directors to retire by rotation shallbethose who wish toretire and offernot themselvesre-election.for Any further directors so to retireshall bethose the of other directors subject toretirement rotation by who been have longest in office since they were last re-elected but,as between personswho became orwere last re-elected onthe those to retiresame day, shall (unless they otherwise agreeamong themselves) bedetermined lot. by In addition,directorany who would otherwisenot be requiredtoretire shall retire rotation by the at third after AGM they were last re-elected. although However, requirednot the by Articles, the boardhas resolved and that infuture thisfor year, years,all directors should offer themselvesfor re-electionannually, inaccordance with good corporategovernance. Thecompany ordinary by may resolution remove any directorbefore the expiration his/her of term of office.In addition, the boardmay terminate an agreementarrangementor with directorany thefor provisionhis/her of services tothe company. ariationrights of ransfershares of V timeanyIf at the capital the of company isdivided into different classes of shares, the special rights attaching toclassany bevariedmay orrevoked either: with (i) the written consent the of holders least at of innominal 75% value the of issued shares the of relevantclass; or with (ii) the sanction special a of resolution passed a at separategeneral meeting the of holders the of shares the of relevant class. Withoutguidance tospecialany rights previously conferredonthe holders existingany of shares orclass shares, of shareany beissuedmay with such preferred, deferred,orother special rights, orsuch restrictions, whetherinregard todividend, voting, return capital of orotherwise as the company frommay time totime by ordinaryresolution determine. T Theboard refusemay toregister transfer a a of certificated share which is not fully paid, provided that therefusal does preventnot dealings inshares inthe companyfrom taking place onanopen and proper basis.The board alsomay refuse toregister transfer a certificated a of share unless the(i) instrument of transferislodged, duly stamped stampable), (if the at registeredofficeof companythe orany other place decidedthe by board, and isaccompanied the by certificatefor the share to which it relates and such otherevidence as the board reasonablymay require to showthe right the of transferor tomake the transfer; itisinrespect (ii) only of one class shares; of and it (iii) isinfavour morenot of than four transferees. Transfersuncertificated of shares must be carried out usingCREST and the board can refuse toregister a transferanuncertificated of share accordancein with theregulations governing the operation CREST. of Pearsonalso operates nominee a shareholding arrangementknown as Sharestore which holds shares onbehalf shares employees. of There were 2,027,976 DecemberThe trustees held so as31 2010. at holding employee instructionsthe from voting seek shares these asbeneficial votingand owner, rights are not exercised ifnoinstructions are given. 62 Pearson plc Annual report and accounts 2010

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Powers of the directors Subject to the company’s Articles, the Act and any directions given by special resolution, the business of the company will be managed by the board who may exercise all the powers of the company, including powers relating to the issue and/or buying back of shares by the company (subject to any statutory restrictions or restrictions imposed by shareholders in general meeting).

Significant agreements The following significant agreements contain provisions entitling the counterparties to exercise termination or other rights in the event of a change of control of the company: Under the $1,750,000,000 revolving credit facility agreement dated November 2010 which matures in November 2015 between, amongst others, the company, HSBC Bank plc (as facility agent) and the banks and financial institutions named therein as lenders (together, the Facilities), any such bank may, upon a change of control, require its outstanding advances, together with accrued interest and any other amounts payable in respect of such Facilities, and its commitments, to be cancelled, each within 60 days of notification to the banks by the facility agent. For these purposes, a ‘change of control’ occurs if the company becomes a subsidiary of any other company or one or more persons acting either individually or in concert, obtains control (as defined in section 1124 of the Corporation Tax Act 2010) of the company. Shares acquired through the company’s employee share plans rank pari passu with shares in issue and have no special rights. For legal and practical reasons, the rules of these plans set out the consequences of a change of control of the company.