Focused on delivery Pearson Annual report and accounts 2015 Pearson at a glance Financial highlights Sales North America 66% £2,940m Core 19% £836m £4.5bn Growth 15% £692m 2015 -5% Sales by Geography Adjusted operating profi t North America 72% £480m Core 17% £114m Growth -2% -£12m £723m Penguin Random House 13% £90m 2015 Discontinued £51m -3% $GMXVWHGRSHUDWLQJSURȴW by Geography Average annual growth in Sales £m $GMXVWHGRSHUDWLQJSURȴW £m headline terms 2010–2015 6,000 1,200 Adjusted earnings per share 5,000 1,000 -1.9% 4,000 800 Operating cash fl ow 3,000 600 -16.3% 2,000 400 Dividend 1,000 200 +6.1% 151413121110 151413121110 To read about our KPIs go to p14 Throughout this report growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated. Where quoted, underlying growth rates exclude both currency movements and portfolio changes. Section 1 Our business 01 About Pearson Strategic report Our business Our Pearson is the world’s learning company, with Our business 02 Chairman’s introduction global capabilities in educational courseware 04 Chief executive’s strategic overview and assessment, based on a strong portfolio of 08 Our business model products and services, powered by technology. We believe that our strategy of combining these core capabilities with services enable our partners to scale online, reach more people and performanceOur Our performance ensure better learning outcomes, providing 10 Financial overview Pearson with a larger market opportunity, a 14 Key performance indicators 16 Operating performance overview sharper focus on the fastest-growing education 18 Operating performance: markets and stronger fi nancial returns. North America, Core, Growth 34 Other fi nancial information Our mission is to help people make progress 38 Risk management 41 Principal risks and uncertainties through access to better learning. We believe 46 Targeting growth through effi cacy Our Social impact Social Our that learning opens up opportunities, creating Our social impact fulfi lling careers and better lives. 54 Our social impact overview 56 Sustainability 59 Our values and behaviours 61 Our relationships 63 Our planet 65 Impact campaigns 67 Social innovation Governance Governance 68 Governance overview 72 Leadership & eff ectiveness 82 Accountability 90 Engagement 94 Report on directors’ remuneration 118 Additional disclosures Financial statementsFinancial Financial statements 126 Independent auditors’ report This strategic report is formed of three sections ‘Our business’, to the members of Pearson plc Our performance’ and ‘Social impact’, (p02-67), and was approved 134 Group accounts for issue by the board on 4 March 2016 and signed on its behalf by: 208 Parent company accounts 222 Five-year summary 224 Corporate and operating measures 227 Shareholder information BC Principal offi ces worldwide Coram Williams Chief fi nancial offi cer 02 Pearson plc Annual report and accounts 2015 Chairman’s introduction Sidney Taurel at the same or lower cost. The value of a university Chairman degree continues to grow, but many students and institutions face cost pressures. These changes off er big opportunities for Pearson, but also present risks and transitions that we will need to manage in some of our traditionally strong businesses. With these factors in mind, my immediate priorities areclear: I will be supporting our management team to ensure that we stay focused on our biggest strategic “ My focus will be on helping growth objectives. I will off er guidance to help them to make further guide Pearson back to growth, progress on simplifying and integrating the business. supporting the management We need to make sure that Pearson is better able to leverage our assets, skills, and technology platforms team and all of our employees in order to deploy our products globally. in our mission: to help more I will be supporting the team to ensure that capital is allocated in a way that provides better returns for people make progress in their shareholders, ultimately creating a better, more sustainable company for the future. lives through learning.” We will engage transparently with shareholders on our capital allocation plans and progress against our Dear shareholders, strategic goals, as well as on all important issues. I am proud to introduce our annual report for the fi rst time as Pearson’s chairman. We plan to hold our dividend at the 2015 level while we rebuild cover, refl ecting the board’s confi dence in the My predecessor, Glen Moreno, made a major medium-term outlook for our business, and we are contribution to Pearson during his long and successful committed to increasing total shareholder returns. tenure as chairman. I am sure my fellow shareholders These priorities require strong leadership, will join me in thanking Glen and wishing him all the dedication and hard work from me, the board, best for the future. and the management team. This is an important time to be joining Pearson. Our leadership team Our 2015 performance was not what we would have wanted, and we now have a plan in place to We have continued to enhance the strength and depth return the company to growth. of our board, including the appointment of Coram Williams as our chief fi nancial offi cer. Coram has a decade’s The company has a strong purpose at its heart, and has experience working directly for Pearson and helped to made great strides in focusing on education. My own lead our joint venture, Penguin Random House, through focus will be on helping guide Pearson back to growth, a successful company integration as its fi rst CFO. supporting the management team and all of our employees in our mission: to help more people make Like me, Lincoln Wallen joined the board on 1 January progress in their lives through learning. 2016. Lincoln is chief technology offi cer for DreamWorks Animation, and his appointment further strengthens Our immediate priorities our digital capabilities. Like thousands of Pearson This is a challenging time for businesses in global employees across the globe, he also has a background education, with rapid changes taking place in the sector. in education and teaching. Digital technology is revolutionising education just as it We have an experienced executive team, and committed has all other aspects of the way we work, communicate employees around the world. I look forward to working with and do business. In an era of constrained spending, John Fallon and the executive team to deliver our agenda. there is a big productivity challenge, as governments Read more about our board on pages 72-73. and education leaders seek to achieve better outcomes Section 1 Our business 03 Our business Our Building a company for the future Share price performance One year % change I led Eli Lilly, a business in the global health sector, as CEO and Chair for ten years. I see some clear parallels Pearson -38.2% between health and education that I believe provide FTSE 100 -4.9% opportunities for Pearson. FTSE All-Share -2.5% Like health, education aff ects every citizen of the world FTSE All-Share Media 13.3% in a deep and personal way. Both sectors have seen STOXX 600 Media 12.0% dramatic increases in the use of digital technologies Five years % change for the benefi t of users – in our case, teachers and students. For us, this means personalised, adaptive performanceOur Pearson -27.0% learning, with the ability to measure and improve FTSE 100 5.8% outcomes at an individual level. FTSE All-Share 12.5% So we are continuing at pace on our mission to become FTSE All-Share Media 78.2% more digital and service-driven, and a simpler, better STOXX 600 Media 68.8% integrated business, with effi cacy at the heart of Ten years % change everything we do. Read more on our ongoing Pearson 7.1% commitment to effi cacy on pages 46-53. FTSE 100 11.1% Pearson’s future FTSE All-Share 21.0% I would like to thank you for your continued support Our Social impact Social Our FTSE All-Share Media 88.2% of Pearson. It has been a tough 2015, and there are STOXX 600 Media 36.1% undoubtedly challenges ahead. Pearson is a company Source: Datastream to 31 December 2015 with strong market positions, real competitive advantage and a signifi cant medium-term market opportunity. The board believes that the plans we are enacting will help to build on these strengths and enjoy Total shareholder return (TSR) See p14 sustained growth. One year % change I see an exciting future ahead for Pearson – as with Pearson -35.7% my experience in the health sector, I am inspired by FTSE 100 -1.3% working in a company with a strong sense of purpose. FTSE All-Share 1.0% As chairman I am fully focused on helping the Governance FTSE All-Share Media 16.5% management team develop our strategy and deliver long-term value for our students, customers and you, STOXX 600 Media 15.3% our shareholders. Five years % change Pearson -11.2% FTSE 100 26.9% FTSE All-Share 33.8% Sidney Taurel Chairman FTSE All-Share Media 107.5% STOXX 600 Media 102.6% Financial statementsFinancial Ten years % change Read our full Governance section Pearson 59.8% Governance overview p70-71 FTSE 100 60.2% Leadership & eff ectiveness p72-81 FTSE All-Share 71.8% Accountability p82-89 FTSE All-Share Media 155.8% Engagement p90-93 STOXX 600 Media 97.4% Report on directors’ remuneration p94-117 Source: Datastream to 31 December 2015 Additional disclosures p118-123 04 Pearson plc Annual report and accounts 2015 Chief executive’s strategic overview John Fallon Dear shareholders, Chief executive 2015 was a year of change and challenge at Pearson, which ultimately will leave us better placed to meet the huge unmet demands in global education.