Statement of corporate governance

The following sections explain how the Company applies the principles and supporting principles of the Combined Code on Corporate Governance (the “Code”).

The Board

The Board is chaired by Sir Philip Hampton. At 15 May 2007, the Board consisted of two Executive Directors and five Non-Executive Directors. Dr John McAdam, Chief Executive of ICI plc, is the Senior Independent Director. Anna Ford was appointed to the Board as a Non-Executive Director on 2 May 2006 and Val Gooding on 11 January 2007. Bridget Macaskill left the Board following the Annual General Meeting (“AGM”) in 2006 and Jamie Dundas stepped down on 2 February 2007.

Biographical details of the Directors are set out in Board of Directors.

The Board held nine scheduled meetings during the year, including a two-day strategy conference, one of them at the TU Clothing Store Support Centre and Distribution Facility at Coventry. The Board met on several other occasions outside of the formal schedule. The Non-Executive Directors met during the year without the Executive Directors being present.

Division of responsibilities

There is a clear division of responsibilities between the Chairman and the Chief Executive which is set out in writing and has been approved by the Board. Philip Hampton is responsible for leadership of the Board, setting its agenda and monitoring its effectiveness. He ensures effective communication with shareholders and that the Board is aware of the views of major shareholders. He facilitates both the contribution of the Non-Executive Directors and constructive relations between the Executive and Non-Executive Directors. He ensures that the Chief Executive develops a strategy which is supported by the Board as a whole. Justin King is responsible for executing the strategy once agreed by the Board. He creates a framework of values, organisation and objectives to ensure the successful delivery of key targets, and allocates decision making and responsibilities accordingly. He takes a leading role, with the Chairman, in the relationship with all external agencies and in promoting Sainsbury’s.

Independence/Non-Executive Directors

The Chairman satisfied the independence criteria of the Code on his appointment and all the Non-Executive Directors who have served during the year are considered to be independent according to the principles of the Code. Bob Stack is a Director of Cadbury Schweppes plc which supplies products to Sainsbury’s, but neither the Board, nor Cadbury Schweppes, considers the relationship to be material in the context of their overall businesses.

The Non-Executive Directors bring wide and varied commercial experience to Board and Committee deliberations. They are appointed for an initial three-year term, subject to election by shareholders at the first AGM after their appointment, after which their appointment may be extended for a second term, subject to mutual agreement and shareholder approval.

The Board’s role

The Board is focused on delivering sustainable added value for shareholders. It considers strategic issues, key projects and major investments and regularly monitors performance against delivery of the agreed key targets. It approves the corporate plan and the annual budget and reviews performance against targets at every meeting. These and other key responsibilities are formally reserved powers of the Board.

The Board considered a number of specific projects and initiatives during the year, including the proposals made by the private equity consortium, all of which were subject to a number of pre-conditions related to the consortium’s proposed financing structure. In addition, the Board considered and approved the new three-year targets and the restructuring of the Group’s interest in Sainsbury’s Bank. It continues to monitor the progress of the investigation by the Competition Commission into grocery retailing in the UK, and reviews the Company’s development, leadership and succession planning programmes.

The Board delegates certain responsibilities to its principal committees. The Corporate Responsibility (“CR”) Committee established during the year will advise the Board on broad CR policy, taking into account the Company’s CR objectives and the overall strategic plan. Through the Audit Committee, the Directors ensure the integrity of financial information, the effectiveness of the financial controls and the internal control and risk management systems. The Remuneration Committee sets the remuneration policy for Executive Directors and determines their individual remuneration arrangements. The Nomination Committee recommends the appointment of Board Directors and has responsibility for evaluating the balance of the Board and for succession planning at Board level. Further details are set out below.

Attendance

During the year the Directors attended the following number of scheduled meetings of the Board and its Committees (the number of meetings held whilst they were Directors is shown in brackets):

Number of meetings	Board	Audit Committee	Nomination Committee	Remuneration Committee
Anna Ford	9(9)	—	2(2)	4(4)
Val Gooding1	2(2)	—	1(1)	—
Philip Hampton	9(9)	—	2(2)	—
Gary Hughes	9(9)	4(4)	2(2)	—
Justin King	9(9)	—	—	—
John McAdam	9(9)	4(4)	2(2)	—
Darren Shapland	9(9)	—	—	—
Bob Stack	9(9)	—	2(2)	4(4)
Appointed to the Board on 11 January 2007
Bridget Macaskill	3(3)	—	1(1)	1(1)
Jamie Dundas	8(8)	3(3)	2(2)	3(3)

Information and development

The quality and supply of information provided to the Board is reviewed as part of the Board evaluation exercise. The Chairman is responsible for ensuring that all Directors are properly briefed on issues arising at Board meetings and that they have full and timely access to relevant information.

There is an agreed procedure by which members of the Board may take independent professional advice at the Company’s expense in the furtherance of their duties. The Company has a programme for meeting Directors’ training and development requirements. Newly appointed Directors who do not have previous public company experience at Board level are provided with appropriate training on their role and responsibilities. New Directors participate in a comprehensive and tailored induction programme including store and depot visits and meetings with members of the Operating Board, senior management and external advisors. Subsequent training is available on an ongoing basis to meet particular needs with the emphasis on governance and accounting developments. During the year the Company Secretary, Tim Fallowfield, has provided updates to the Board on relevant governance matters, new legislation and on Directors’ duties and obligations, whilst the Audit Committee regularly considers new accounting developments through presentations from management and the external auditors. The Board programme includes presentations from management which, together with site visits, increases the Non-Executive Directors’ understanding of the business and the sector.

All Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for governance matters. The appointment and removal of the Company Secretary is one of the matters reserved for the Board.

Performance evaluation

In March 2006 the Board undertook an extensive evaluation of its performance and effectiveness with the assistance of Egon Zehnder International, the international search consultancy. This confirmed that the Board was acting effectively and identified a number of action points for further consideration. The purpose of the internal evaluation exercise conducted in March 2007 was to review the progress that had been made during the year and identify any new issues. Having agreed the key objectives of this year’s exercise with the Chairman, the Company Secretary met with each Director separately to discuss the Board’s role and structure, process and relationships and any emerging issues and then presented the findings to the Board, identifying the key themes that were working well and areas which could be improved or approached differently. The Board concluded that it was satisfied with the progress that had been made during the year and that it was working effectively.

The Senior Independent Director received comments on the Chairman’s performance and subsequently met with him to provide feedback to him. The Chairman separately reviewed the contribution of each of the Directors with them.

Operating Board

Day to day management of the Company is delegated to the Operating Board, which is chaired by Justin King. The Operating Board holds 10 formal meetings a year. Directors’ responsibilities are set out in Operating Board. It has formal terms of reference setting out its key responsibilities. Minutes are copied to the Chairman and Non-Executive Directors. Operating Board members regularly attend and present at Board meetings as well as the strategy conference.

The Operating Board has delegated certain powers to the Trading Board, which is responsible for ranging and sourcing product, price and promotions, advertising and marketing; to the Retail Board, which has responsibility for stores, service and availability and supply chain operations; and to the Investment Board, which is responsible for investment decisions. The Trading Board is chaired by Mike Coupe, Trading Director; the Retail Board is chaired by Ken McMeikan, Retail Director; and the Investment Board by Darren Shapland, Chief Financial Officer. The Corporate Responsibility Steering Group was established this year; it is chaired by Justin King and its membership comprises the five Operating Board Directors who represent each of the five CR principles (see below).

Board Committees

The Board has delegated certain responsibilities to the Nomination, Remuneration, Corporate Responsibility and Audit Committees.

Nomination Committee

The Nomination Committee is chaired by Philip Hampton and comprises each of the Non-Executive Directors. Justin King is not a member of the Committee although he is invited to attend meetings.

The Committee led the recruitment process for each of the Board appointments during the year, which has resulted in Anna Ford and Val Gooding being appointed. Search consultants were instructed by the Committee on the searches. The Committee considered the skills, knowledge, background and experience required for each role, and a job specification was prepared for each appointment. The Committee also specified the time commitment expected of the roles. Profiles of a shortlist of preferred candidates were prepared for the Committee and the potential composition and mix of the candidates were considered from a team perspective in order to ensure a complementary combination of competencies and experience. Prior to each appointment the Committee considered a full range of references and the Non-Executive Directors met the preferred candidate. The Committee is currently undertaking an extensive search for a further Non-Executive Director.

The Committee’s terms of reference are available on the website (www.j-sainsbury.co.uk/governance) and set out the Committee’s responsibilities. The Committee meets when necessary and in 2006/07 met formally on two occasions and received further regular updates on the recruitment process.

Remuneration Committee

The Committee is chaired by Bob Stack who was appointed a Non-Executive Director and Chairman of the Committee on 1 January 2005. The Remuneration report is set out in Remuneration report.

Corporate Responsibility Committee

As corporate responsibility has become an intrinsic part of the strategic agenda, the Board reviewed the CR governance structure during the year and established a new CR Committee. This is chaired by Anna Ford, and Justin King and a Non-Executive Director will be its members. It will meet twice a year and will report to the Board after each meeting.

Formal meetings are supported by CR strategic meetings hosted by Anna Ford and Justin King. Each meeting will be based around one of our five CR principles and key external stakeholders will be invited to attend. The first meeting was held in February 2007 relating to Sourcing with Integrity.

At operational level, Justin King is the overall CR champion and chairs the CR Steering Group, attended by the five Operating Board Directors who champion each of our five CR principles.

The Best for Food and Health	Gwyn Burr
Sourcing with Integrity	Mike Coupe
Respect for Our Environment	Darren Shapland
Making a Positive Difference to Our Community	Ken McMeikan
A Great Place to Work	Imelda Walsh

A summary of the Company’s corporate responsibility priorities and activities are set in Corporate Responsibility. This year’s Corporate Responsibility Report will be published in June 2007.

The Association of British Insurers recommends that the Board considers material risks and control processes relating to corporate responsibility. The Audit Committee’s review of the system of internal controls and risk management processes referred to below includes corporate responsibility and the Committee considers any major corporate responsibility or brand reputation risks identified by the process, to the extent any such exist. The induction programme for new Board Directors includes a full review of corporate responsibility.

Audit Committee

During the year Gary Hughes was appointed Chairman of the Audit Committee with John McAdam and Jamie Dundas (until his retirement in February 2007) as its other members, all of whom are independent Non-Executive Directors. Following Jamie Dundas’ retirement, the Committee membership has comprised only two independent Non- Executive Directors, but Philip Hampton, who has extensive financial experience, attends all meetings of the Committee. The Board is currently recruiting a new Non-Executive Director who will also join the Committee and bring the membership to three. The Board has determined that Gary Hughes has recent and relevant financial experience. Philip Hampton, Justin King, Darren Shapland, Richard Chadwick, the Head of Internal Audit, other senior members of the Finance Division and the external auditors are invited to attend Committee meetings. The Company Secretary acts as secretary to the Committee.

During the year the Committee met on four occasions, the agendas being organised around the Company’s reporting cycle. It monitored the integrity of the financial statements and any formal announcements relating to the Company’s financial performance and reviewed any significant financial judgements contained in them. The Committee has also reviewed the effectiveness of the Company’s financial controls and the internal control and risk management systems and has monitored progress to ensure that any required remedial action has been or is being taken on any identified weaknesses.

The Committee reviewed PricewaterhouseCoopers LLP’s (‘PwC’) overall work plan and approved their remuneration and terms of engagement and considered in detail the results of the audit, PwC’s performance and independence and the effectiveness of the overall audit process. The Committee recommended PwC’s re-appointment as auditors to the Board and this resolution will be put to shareholders at the AGM.

The Committee has implemented the Company’s policy which restricts the engagement of PwC in relation to non-audit services. The policy is designed to ensure that the provision of such services does not have an impact on the external auditors’ independence and objectivity. It identifies certain types of engagement that the external auditors shall not undertake and others (such as tax planning and mergers and acquisitions advice) that can only be undertaken with appropriate authority from the Committee Chairman or the Committee where non-audit fees will exceed pre-set thresholds. The Committee receives a report at each meeting on the non-audit services being provided and the cumulative total of non-audit fees. In the event that cumulative non-audit fees exceed the audit fee then all subsequent non-audit expenditure must be approved by the Committee Chairman. The majority of the non-audit work undertaken during 2006/07 related to Corporation Tax and VAT advice but work was also carried out on the performance conditions relating to the Company’s long-term incentive plans and the restructuring of the Group’s interest in Sainsbury’s Bank, see Sainsbury’s Bank and note 7 to the financial statements for details. The non-audit fees for the year were £0.5 million and the audit fee for the year in respect of the Group, Company and its subsidiaries was £0.9 million.

The Committee has regularly reviewed the Internal Audit department’s resources, budget, work programme, results and management’s implementation of its recommendations, and overseen a formal external review of the department’s effectiveness during the year. The Head of Internal Audit has direct access to the Committee Chairman and Philip Hampton. Gary Hughes has held separate meetings with him and PwC during the year. The Committee regularly met with PwC without management being present, and may meet the Head of Internal Audit separately if it deems necessary.

The Committee has reviewed the Company’s ‘whistleblowing’ procedures which were strengthened during the year and confirmed that arrangements are in place to enable colleagues and suppliers to raise concerns about possible improprieties on a confidential basis.

During the year the Company introduced a new fraud policy and established a Serious Fraud Committee, which convenes in the event of serious incidents to oversee case management and ensure preventative measures are taken. The Audit Committee receives an update at each meeting on all material frauds and the actions taken.

The Committee’s terms of reference, which are available on the website (www.j-sainsbury.co.uk/governance), set out the Committee’s responsibilities.

Internal control

The Board has overall responsibility for the system of internal controls, including risk management, and has delegated certain of these responsibilities to the Audit Committee. The Audit Committee has reviewed the effectiveness of the system of internal control and ensured that any required remedial action has or is being taken on any identified weaknesses. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve the Company’s business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. It includes all controls including financial, operational and compliance controls and risk management procedures.

The processes used to assess the effectiveness of the internal control systems are ongoing, enabling a cumulative assessment to be made, and include the following:

discussion and approval by the Board of the Company’s strategic direction, plans and objectives and the risks to achieving them;
review and approval by the Board of budgets and forecasts, including both revenue and capital expenditure;
regular operational and financial reviews of performance against budgets and forecasts by management and the Board;
regular reviews by management of the risks to achieving objectives and actions being taken to mitigate them;
regular reviews by the Board and Audit Committee of identified fraudulent activity and any whistleblowing by colleagues or suppliers, and actions being taken to remedy any control weaknesses;
regular reviews by management and the Audit Committee of the scope and results of internal audit work across the Company and of the implementation of recommendations. The scope of the work covers all key activities of the Company and concentrates on higher risk areas;
reviews of the scope of the work of the external auditors by the Audit Committee and any significant issues arising;
reviews by the Audit Committee of accounting policies and levels of delegated authority; and
consideration by the Board of the major risks facing the Group and by the Audit Committee of the procedures to manage them. These include health and safety, legal compliance, litigation, quality assurance, insurance and security and reputational, social, ethical and environmental risks.

There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place throughout the year and up to the date of approval of the Annual Report and Financial Statements and accords with the Turnbull guidance (2005). The effectiveness of the process is reviewed annually by the Audit Committee which then reports to the Board. The process consists of:

formal identification by management of each division of the key risks to achieving their business objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated and actions necessary to mitigate them are identified. The risks and progress in mitigating them are regularly reviewed at divisional leadership team meetings as part of their normal business activities;
certification by management that they are responsible for managing the risks to their business objectives and that the internal controls are such that they provide reasonable but not absolute assurance that the risks in their areas of responsibility are appropriately identified, evaluated and managed;
reporting and review by the Operating Board of risk management activities and actions to improve their effectiveness;
assurance from specialist functions and committees that legal and regulatory, health and safety, social, ethical and environmental risks are appropriately identified and managed; and
independent assurance by Internal Audit as to the existence and effectiveness of the risk management activities described by management.

The system of internal control and risk management is embedded into the operations of the Company, and the actions taken to mitigate any weaknesses are carefully monitored.

Investor relations

The Company is committed to maintaining good communications with investors. Normal shareholder contact is the responsibility of the Chief Executive, Chief Financial Officer and Head of Investor Relations. The Chairman, Philip Hampton, is generally available to shareholders and meets with institutional investors as required.

There is a regular dialogue with institutional investors who, along with buyside and sellside analysts, are invited to presentations by the Company immediately after the announcement of the Company’s interim and full year results. They are also invited to participate in conference calls following the announcement of the Company’s trading statements. The content of these presentations and conference calls are webcast and are posted on the Company’s website (www.j-sainsbury.co.uk/investors) so as to be available to all investors.

To ensure that the Board understand the views of the major shareholders, Makinson Cowell provide investor relations consultancy services to the Company and reported to the Board on the views of institutional investors and sellside analysts. Non-Executive Directors also receive regular market reports and broker updates from the Company’s Investor Relations department.

Shareholders have the opportunity to meet and question the Board at the AGM, which will be held on 11 July 2007. There will be a display of various aspects of the Company’s activities and Justin King will make a business presentation. The Senior Independent Director and Chairmen of the Audit, Nomination, Remuneration and CR Committees will be available to answer questions. A detailed explanation of each item of special business to be considered at the AGM is included with the Notice of Meeting which will be sent to shareholders at least 20 working days before the meeting. All resolutions proposed at the AGM will be taken on a poll vote. This follows best practice guidelines and enables the Company to count all votes, not just those of shareholders who attend the meeting.

Information on matters of particular interest to investors is set out in Shareholder information and on the Company’s website (www.j-sainsbury.co.uk/investors).

Compliance statement

During the year, the Company has complied with the provisions of the Code with the exception that, as explained above, the Audit Committee currently only has two Non-Executive Directors as members instead of three. This will be resolved once the existing search for a new Non-Executive Director is successfully completed.