The Combined Code on Corporate Governance

The Combined Code on Corporate Governance sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority requires companies listed in the UK to disclose, in relation to Section 1 of the Combined Code, how they have applied its principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with companies must provide an explanation.

The Combined Code was reviewed by the Financial Reporting Council during 2006 with a revised Code becoming effective in respect of financial years commencing on or after 1 November 2006 and accordingly the changes do not apply to the year under review.

It is the Board’s view that the Company has been fully compliant throughout the accounting period with the provisions set down in Section 1 of the Combined Code (including the changes that became effective for financial years commencing on or after 1 November 2006). This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during 2006. Further information on the Code can be found on the Financial Reporting Council’s website, www.frc.org.uk.

The Board

The directors are responsible to shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives. It meets regularly to determine the strategic direction, to review the Company’s operating and financial performance and to oversee that the Company is adequately resourced and effectively controlled. The specific duties of the Board are clearly set out in its terms of reference that address a wide range of corporate governance issues and list those items that are specifically reserved for decision by the Board. Matters requiring Board approval include:

• Group strategy and business plans;
• Acquisitions, disposals and other transactions outside delegated limits;
• Financial reporting and controls;
• Capital structure;
• Dividend policy;
• Shareholder documentation;
• The constitution of Board committees;
• Key business policies, including the remuneration policy.

Matters that are not specifically reserved to the Board and its committees under its terms of reference, or to shareholders in General Meeting, are delegated to the Group Chief Executive. The Board’s terms of reference also set out those matters that must be reported to the Board, such as significant litigation or material regulatory breaches, and cover how matters requiring consideration by the Board that arise between scheduled meetings should be dealt with.

The Board and its committees operate in line with work plans agreed prior to the start of each year. At Board and committee meetings, directors receive regular reports on the Group’s financial position, risk management, regulatory compliance, key business operations and other material issues. Directors are fully briefed in advance of Board and committee meetings on all matters to be discussed. The Group Company Secretary is responsible for following Board procedures and advising the Board, through the Chairman, on governance matters. All directors have access to his advice and services.

The Board has adopted a procedure whereby directors may, in the performance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. No director obtained any such independent professional advice during 2006.

The directors

The Board currently comprises the Chairman, six independent non-executive directors and four executive directors. Each non-executive director serves for a fixed term not exceeding three years that may be renewed by mutual agreement. Subject to the Board being satisfied with a director’s performance, independence and commitment, there is no specified limit regarding the number of terms a director may serve. All directors are required to be elected by shareholders at the Annual General Meeting following his/her appointment by the Board and be re-elected at least once every three years. Any non-executive director who has served on the Board for nine years or more is required to submit himself/herself for re-election annually. The Board’s policy is to appoint and retain non-executive directors who can apply their wider knowledge and experiences to their understanding of the Aviva Group, and to review and refresh regularly the skills and experience it requires through a programme of rotational retirement. In addition to the strengths of experience, diversity and an international perspective, the Board also seeks to comply with the requirements of the Combined Code on the independence of directors. The process for appointing new directors is conducted by the Nomination Committee whose report, including a description of its duties, is set out below.

The Combined Code requires that at least half the Board, excluding the Chairman, should comprise independent non-executive directors as determined by the Board. The Nomination Committee performs an annual review of directors’ interests in which all potential or perceived conflicts, including time commitments, length of service and other issues relevant to their independence, are considered. It is the Board’s view that an independent non-executive director also needs to be able to present an objective, rigorous and constructive challenge to management, drawing on his/her wider experiences to question assumptions and viewpoints and where necessary defend their beliefs. To be effective, an independent director needs to acquire a sound understanding of the industry and the Company so as to be able to evaluate properly the information provided. Having considered the matter carefully the Board is of the opinion that all of the current non-executive directors are independent and free from any relationship or circumstances that could affect, or appear to affect their independent judgement. Accordingly, over half of the directors, excluding the Chairman, are independent non-executive directors. Each of the directors being proposed for re-election at the 2007 Annual General Meeting has been subject to a formal performance evaluation and took part in a peer evaluation review during 2006. Biographical details of all the directors, including those proposed for re-election, are set out on the board of directors page.

The Chairman

The respective roles of the Chairman and Group Chief Executive are set out in the Board’s terms of reference. The Chairman’s priority is the management of the Board and the Group Chief Executive’s priority is the management of the Company. The Chairman’s contractual commitment to the Company is two to three days per week and his main interests outside the Company are set out in his biographical details. There have been no material changes to these commitments during the year.

Senior independent director

The main responsibility of the senior independent director is to be available to shareholders should they have concerns that they have been unable to resolve through normal channels, or when such channels would be inappropriate. The senior independent director is also responsible for leading the Board’s discussion on the Chairman’s performance and the appointment of a new chairman, when appropriate. Wim Dik served as the senior independent director throughout 2006.

Board effectiveness

The effectiveness of the Board is vital to the success of the Group. The Company undertakes a rigorous evaluation each year in order to assess how well the Board, its committees, the directors and the Chairman are performing. The process is led by the Chairman and supported by the Group Company Secretary. All directors complete a questionnaire regarding the Board and committees’ processes, their effectiveness and where improvements may be considered. The process also includes a peer review in which directors assess their fellow directors’ performance against set criteria, including the skills that they bring to the Company and the contribution they make. This process is complemented by separate meetings between each director and the Chairman where feedback is discussed. In 2006 a new format was introduced whereby directors completed a much more comprehensive questionnaire which was returned to an independent third-party who had helped with the preparation of the questions, and who collated comments, drew the conclusions and presented the findings to the Board.

The performance of the Chairman is also included in the above process and therefore takes into account the views of both the executive, and non-executive, directors. The Chairman’s evaluation is managed by the senior independent director who provides feedback to the Chairman. As part of the Chairman’s evaluation the non-executive directors meet separately under the chairmanship of the senior independent director.

Following this comprehensive review, the directors have concluded that the Board and its committees operate effectively. Additionally, the Chairman has concluded that each director contributes effectively and demonstrates full commitment to his/her duties.

The Board evaluation process assesses the executive directors in their capacities as directors of the Company. They are evaluated in respect of their executive duties through a separate process whereby the Chairman and the non-executive directors assess the Group Chief Executive and the Group Chief Executive assesses the executive directors.

Training and development

The Board believes strongly in the development of all its employees and directors and it is a requirement of each director’s appointment that they commit to continue their development. The form that this development takes is subject to individual director’s requirements and the quality and relevance of the training available. During the year, directors attended a number of external courses on issues ranging from seminars for members of the Audit and Remuneration Committees to workshops on financial risks and individual capital assessments. In addition, members of the Risk and Regulatory Committee received two tailored training/induction sessions. Training sessions have been built into the Board’s and committees’ work plans for 2007. The Board made visits to the Group’s businesses located in York and India during the year to gain a closer understanding of their operations.

The Board has a comprehensive induction programme consisting of 13 separate sessions which take place over a number of months at times convenient for the director. The sessions include presentations from key members of senior management, visits to the Group’s main operating businesses, meetings with the external auditor, and one of the Company’s corporate brokers. Further or follow-up meetings are arranged where a director requires a deeper understanding on a particular item.

Directors’ attendance

The Company requires directors to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company in order to perform their duties. The attendance of the directors at the Board and committee meetings held in 2006 was as follows:

Board and Board committee attendance 2006

– Indicates not a member of that committee.
* Retired 31 December 2006.

During 2006 the Chairman and the non-executive directors met on one occasion in the absence of the executive directors and there was one meeting of the non-executive directors chaired by the senior independent director at which the Chairman was not present.

Board committees

The Board has established the following standing committees to oversee and debate important issues of policy and oversight outside the main Board meetings.

• Audit Committee
• Nomination Committee
• Risk and Regulatory Committee
• Corporate Social Responsibility Committee
• Remuneration Committee.

Throughout the year the chairman of each committee provides the Board with a summary of the key issues considered at the meetings of the committees and the minutes of the committee meetings are circulated to the Board. The committees operate within defined terms of reference, copies of which are published on the Company’s website www.aviva.com and are available from the Group Company Secretary upon request. Board committees are authorised to engage the services of external advisers as they deem necessary in the furtherance of their duties at the Company’s expense.

Reports of the committee chairmen are set out below.

Internal controls

The Combined Code requires directors to review and report annually to shareholders on the effectiveness of the Company’s systems of internal control which include financial, operational and compliance controls, and risk management. The Board has the overall responsibility for maintaining the systems of internal control of the Company and for monitoring their effectiveness; while the implementation of internal control systems is the responsibility of management. The Group’s systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material financial misstatement or loss.

The systems are designed to:

• Safeguard assets;
• Maintain proper accounting records;
• Provide reliable financial information;
• Identify and manage business risks;
• Maintain compliance with appropriate legislation and regulation;
• Identify and adopt best practice.

The principal features of the control framework and the methods by which the Board satisfies itself that it is operating effectively are detailed below.

Control environment

The Group has an established governance framework, the key features of which include:

• Terms of reference for the Board and each of its committees;
• A clear organisational structure, with documented delegation of authority from the Board to executive management;
• A Group policy framework, which sets out risk management and control standards for the Group’s operations worldwide;
• Defined procedures for the approval of major transactions and capital allocation;
• Committees of senior executives responsible for reviewing the Group’s financial risks (Asset and Liability Management Committee) and non-financial ie operational risks (Group Operational Risk Committee).

The Group’s risk and governance framework has been structured in accordance with the Financial Services Authority’s risk-based framework for integrating and embedding risk and capital management (Prudential Sourcebook).

Risk identification, assessment and management

There is in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group which has operated throughout 2006 and up to the date of signing this report. The Group’s risk management and control framework is designed to support the identification, assessment, monitoring, management and control of risks that are significant to the achievement of the Group’s business objectives. The Group has a set of formal policies which govern the management and control of both financial and non-financial risks. The adoption of these policies throughout the Group enables a broadly consistent approach to the management of risk at business unit level. At Group level, policy owners are responsible for the Group-wide aggregation and oversight of their specific risks.

The Asset and Liability Management Committee is responsible for reviewing and monitoring the financial risks to the Group and, with the assistance of its sub-committees, considers the risks relating to life assurance, general insurance, reserving, capital management, credit and investment. Similarly, a Group Operational Risk Committee monitors risks associated with information technology, business protection, human resource management, business standards and regulatory compliance.

Management monitors the completeness of the Group’s risk profile on a regular basis through a Group risk monitoring framework. Each quarter, businesses report residual risk profiles and the adequacy of the mitigating action programmes, based on local materiality levels. These impact assessments are based on financial, reputational and operational criteria. This enables the Group risk function to assess the overall risk exposure and to develop a Group-wide risk profile that is refreshed quarterly. Material items in the Group risk report are reported to the committee of the Group’s senior executives (Executive Committee), the Risk and Regulatory Committee and in respect of social, environmental and ethical risks, the Board’s Corporate Social Responsibility Committee. The Executive Committee consider whether the residual risks are within the Group’s risk appetite, and the adequacy of the mitigating actions.

The Boards, audit committees and management of the operational businesses also consider local risk reports in a similar way. Regular reports are supported by escalation procedures for new or deteriorating risks that are classified at the highest impact levels. In addition, all business unit heads and Group functional heads provide a certificate every six months to confirm compliance with the Group’s governance and risk management framework, and the terms of their delegated authority. They must also specify any risk or control issues not already reported through the regular risk management processes.

Control procedures and monitoring systems

The Group has a well-developed system of planning, incorporating Board approval of a rolling three-year Group plan. Performance against the plan is subsequently monitored and reported to the Board each time it meets. This report also includes updates on relevant measures of solvency and liquidity. Performance is reported through the half-yearly publication of the Company’s results based on accounting policies that are applied consistently throughout the Group. Operational management reports quarterly to the Executive Committee on a wide range of key performance and other significant matters and the Board receives regular representations from the senior executives responsible for each principal business operation.

Whilst the Audit Committee has the overall responsibility of monitoring the Group’s internal control process on behalf of the Board, it is assisted by the Risk and Regulatory Committee which oversees the regulatory compliance and non-financial control processes and reports to the Board regarding such. In addition, the Audit Committee performs an annual review of the effectiveness of the internal audit function and the framework for the Group’s systems of internal control. Throughout 2006, the Audit Committee and the Risk and Regulatory Committee received quarterly reports from the Group Audit Director on issues arising, and updates on previously reported items. More detailed reports on the work of these committees during 2006 are set out below.

The Board has conducted a review of the effectiveness of the Group’s systems of internal control. Where weaknesses are identified as part of the control review, mitigating actions are taken or plans are put in place. These are then monitored by the appropriate committee on behalf of the Board. The Board is not aware of any significant weaknesses that do not have mitigating actions in place.

Internal audit

The Group’s internal audit function advises management on the effectiveness of its internal control systems, the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. Through the Group Audit Director, the internal audit function provides objective assurance on risk and control to both the Audit Committee and Risk and Regulatory Committee. The effectiveness of the Group’s internal audit function is reviewed each year by the Audit Committee. During 2006, the effectiveness of the internal audit peer review process was independently evaluated by KPMG LLP (KPMG).

Communication with shareholders

The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues.

The Group has an ongoing programme of dialogue and meetings between the executive directors and institutional investors, fund managers and analysts. At these meetings, a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of the information already made public.

The Company’s Investor Relations Department is dedicated to facilitating communication with institutional investors. The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The Board receives reports on the matters that have been raised with management at the regular meetings held with the large investors. During the year the Chairman and the senior independent director held a meeting with the major institutional investors and the senior independent director attended investor meetings with management. In addition, the senior independent director is available to meet with major shareholders to discuss any areas of concern that cannot be resolved through normal channels of investor communication and arrangements can be made to meet with the senior independent director through the Group Company Secretary. Similarly, arrangements can be made for major shareholders to meet with newly appointed directors.

The Board consults with shareholders in connection with specific issues where it considers appropriate. For example, the chairman of the Remuneration Committee met with institutional shareholder bodies and a number of major shareholders in 2006 regarding the Company’s proposed changes to the directors’ pension arrangements and the introduction of a long-term savings arrangement, details of which are set out in the Directors’ remuneration report below.

The Board is equally interested in the concerns of private shareholders and, on its behalf, the Group Company Secretary oversees communication with these investors. It is the practice of the Company to issue a postage paid reply form with its Annual General Meeting documentation to enable shareholders to put relevant questions to the directors. This is considered to be particularly helpful for those shareholders who are unable to attend the meeting. Written responses are provided through a brochure containing answers to the most frequently asked questions that is also placed on the Company’s website. All material information reported to the regulatory news services is simultaneously published on the Company’s website affording all shareholders full access to Company announcements.

The Company’s Annual General Meeting provides a valuable opportunity for the Board to communicate with private investors. At the meeting, the Company complies with the Combined Code as it relates to voting, the separation of resolutions and the attendance of committee chairmen. Whenever possible, all directors attend the Annual General Meeting and shareholders are invited to ask questions during the meeting and have an opportunity to meet with the directors following the conclusion of the formal part of the meeting. In line with the revised Combined Code, details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.

The Company’s annual report and accounts and annual review, together with the Company’s interim reports, trading statements and other public announcements are designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Group Chief Executive’s review, and Business review provide an assessment of the Group’s affairs and they will be supported by a presentation to be made at the Annual General Meeting.

Institutional investor

Morley Fund Management Limited (Morley), the Group’s asset management company, believes that good governance contributes to better performance and practices. Therefore, as a major investor, the Group monitors the governance of the companies in which it invests. To this end, Morley holds regular meetings with the senior management of companies where it will raise matters which may affect the future performance of those companies.

Morley maintains a detailed Corporate Governance and Voting Policy as part of its investment strategy, which underpins its approach to engaging and voting at company general meetings. The policy also extends to cover social, environmental and ethical issues. Its policy is applied pragmatically, after careful consideration of all relevant information. In addition, Morley makes detailed voting reports available to clients’ and publishes summary statistics on its website.

Directors’ responsibilities

The directors are required to prepare accounts for each accounting period that comply with the relevant provisions of the Companies Act 1985 and International Financial Reporting Standards (IFRS) as adopted by the European Union, and which present fairly the financial position, financial performance and cash flows of the Company and the Group at the end of the accounting period. A fair presentation of the financial statements in accordance with IFRS requires the directors to:

• select suitable accounting policies and verify they are applied consistently in preparing the accounts, on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and the Group’s financial position and financial performance; and
• state that the Company and the Group have complied with applicable IFRS, subject to any material departures disclosed and explained in the accounts.

The directors are responsible for maintaining proper accounting records which are intended to disclose with reasonable accuracy, at any time, the financial position of the Company and the Group. They are also ultimately responsible for the systems of internal control maintained by the Group for safeguarding the assets of the Company and the Group and for the prevention and detection of fraud and other irregularities. Further details of the systems of internal controls maintained by the Group are more fully described above.

Going concern

After making enquiries, the directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.