Corporate Governance

Statement on compliance

The Company recognises the importance of and is committed to high standards of corporate governance. The Board is accountable to the shareholders for good corporate governance. This report describes how the Board applies the principles of good governance and best practice as set out in the Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2008 (the "Combined Code").

Throughout the year under review, the Board considers that the Company has complied fully with all provisions recommended in Section 1 of the Combined Code.

The Board

The Company is headed by a Board of Directors collectively responsible for the success of the Company. The Board provides leadership within a framework of prudent and effective controls designed to enable risk to be assessed and managed. It sets the Company's strategy and is responsible for reviewing management performance and for ensuring the necessary financial and human resources are in place in order to meet the Company's objectives. The Board also sets the Company's values and standards mindful of its obligations to shareholders and other stakeholders.

The Board currently comprises the Chairman, four Executive Directors and two Non-Executive Directors. The Board regards P N Wilkinson and D J Houghton as being independent. The Chairman and Chief Executive both have clearly defined roles and responsibilities, which are set out in writing and approved by the Board. The Chairman has responsibility for the leadership and the running of the Board, including but not limited to ensuring that a fixed schedule of matters is exclusively retained for the Board's review and approval, and that a framework exists to allow the clear dissemination of relevant and timely information to all Directors for such discussion to occur. He is also responsible for communications with shareholders and for ensuring effective contributions from the Non-Executive Directors. The Chairman has commitments outside of the Company as detailed in his biography on page 23. All Directors are subject to reappointment by shareholders at the first AGM following their appointment and thereafter at intervals of no more than three years.

The Board meets regularly (normally nine times per financial year) and during the period under review there was full attendance at the nine Board meetings that took place by Directors eligible to attend, except for apologies received from B Bloomer in respect of one meeting. The Board regularly reviews the operational performance and plans of the Company and, as necessary, determines the Company's current and proposed strategy. The Executive Directors also meet under the chairmanship of the Chief Executive on a weekly basis to discuss operational matters. All Board members receive agendas and comprehensive papers prior to each Board meeting. All Directors have access to the services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are adhered to. During the year the Board has maintained a register of potential conflicts of interest with its Directors, which is reviewed/updated as necessary. Directors may also obtain further information from any manager or employee of the Company and there is a procedure for Directors to obtain independent advice from external advisors, consultants or any such further professional individual or entity at the Company's expense. The Company maintains appropriate liability insurance for the benefit of its Directors.

The Chairman meets at least annually with the Non-Executive Directors without Executive Directors present and the Non-Executive Directors, led by the Senior Independent Director, P N Wilkinson, meet annually to consider the Chairman's performance, taking into account the Executive Directors' views. The Senior Independent Director is also available to shareholders if they have any concerns, which contact through the normal channels of the Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate.

The terms and conditions of appointment of the Non-Executive Directors are available during normal business hours at the Company's Registered Office and will be available for inspection at the AGM.

New appointments to the Board receive an appropriate induction to gain an understanding of the Company's business, which includes meetings with senior management.

Given the skills and experience of the Non-Executive Directors, their general training requirements are left to their own discretion. The Company makes the necessary resources available to meet any identified requirements. The Chairman conducts a formal annual appraisal process for the Board, its Committees and individual Directors including those Directors due to offer themselves for reappointment at the AGM through submission of a questionnaire which facilitates a Board discussion and, where appropriate, agreed actions for improvements. The Executive Directors are also included in the Company's annual performance appraisal arrangements, which include development and training requirements.

The Board delegates its authority for certain matters to its Audit, Remuneration and Nomination Committees. The Board approves the terms of reference of each of the Committees and they are available on the Company's website, www.thorntons.co.uk, and upon request from the Company Secretary. During the period under review there were three meetings of the Audit Committee and two formal meetings of the Remuneration and Nomination Committees with full attendance of all eligible Directors. In addition to formal Committee meetings, ad hoc decisions of the Committees are taken after discussion throughout the year as necessary through the form of written resolutions.

Nomination Committee

The Nomination Committee is composed of the two independent Directors and the Chairman of the Board, J A von Spreckelsen. The Committee is chaired by J A von Spreckelsen and is responsible for reviewing the credentials of each and every potential Director before such nominee is proposed to the Board. In considering potential appointments to the Board the Committee evaluates the balance of skills, knowledge and experience on the Board when considering the role and capabilities required for a particular appointment. When appointments are being considered, the Committee uses professional external recruitment specialists as and when appropriate, as well as contacts of its Directors and the Company's advisors, as was the case in the appointment of D J Houghton. The Committee also reviews the contribution of Directors offering themselves for reappointment by shareholders.

Remuneration Committee

The Remuneration Committee is composed of the two independent Directors and is chaired by P N Wilkinson. The Board has delegated authority to the Committee for setting the Chairman's, the Executive Directors' and the Company Secretary's remuneration and performance-related awards. Further details of the Committee and Directors' remuneration are set out in the Report on the Directors' Remuneration on pages 34 to 41.

Audit Committee

The Audit Committee throughout the year comprised of the two independent Directors and is chaired by D J Houghton, who succeeded M T P Davey on his resignation in December 2008. It meets three times a year with the external auditors and considers any issues which are identified during the course of their audit work. The Board is satisfied that both Committee members have recent and relevant financial experience. Meetings are also attended, by invitation, by the Chairman, Chief Executive, Finance Director and Financial Controller. The Committee meets at least annually with the external auditors without the Executive Directors present.

The Audit Committee is responsible for monitoring the integrity of the Company's financial statements; reviewing the Company's internal financial controls and internal control and risk management systems; monitoring and reviewing the effectiveness of the internal audit function; making recommendations to the Board regarding the appointment, reappointment or removal of the external auditors and approving their remuneration and terms of engagement; reviewing and monitoring the external auditors' independence and objectivity and the effectiveness of the audit process; and developing and implementing a policy on the engagement of the external auditors to supply non-audit services.

In respect of safeguarding the objectivity and independence of the external auditors, the Committee has a formal policy regarding the provision of non-audit services by the external auditors including certain services which they cannot provide so as not to compromise their independence (for example, bookkeeping or other internal accounting services, internal audit, management roles or legal services). The policy also provides for tendering for services where appropriate and has specific pre-approved categories of work subject to the level of fees involved. A formal rotation policy of the audit partner also exists which limits tenure to a maximum of five years.

The Committee also specifically reviews the levels of all fees paid to the auditors for audit and non-audit services annually. The external auditors report to the Audit Committee each year on the actions they have taken to comply with professional and regulatory requirements and best practice designed to ensure their independence. The Committee reviews whether the auditors believe there are any relationships that may affect their independence and additionally the auditors formally confirm their independence in writing to the Board in respect of the period covered by these financial statements.

The Committee also receives regular detailed reports from the internal audit function and, to ensure its activities are appropriate, reviews its proposed work-plan for future periods.

Internal controls

The Company's control environment is the responsibility of the Company's Directors and managers at all levels. The Board is therefore responsible for establishing and maintaining the Company's system of internal control and for reviewing its effectiveness. No control system can provide absolute protection against material misstatement or loss but it is designed to manage rather than eliminate the risk of failure to achieve business objectives and to provide the Directors with reasonable assurance that problems should be identified on a timely basis and dealt with appropriately.

The Board has delegated responsibility for reviewing the Company's system of internal control and its effectiveness to the Audit Committee. Due to the size of the Company, the Executive Directors are able to monitor performance and evaluate and manage on a continual basis the risks faced by the Company. The key procedures that have been established to provide effective internal control and to comply with the Financial Reporting Council's guidance on Internal Control: Revised Guidance for Directors on the Combined Code (October 2005) include:

• a formalised reporting structure which includes the setting of detailed annual budgets and key performance indicators which are updated on a regular basis to form forecasts which are reviewed at both management and Board meetings;
• regular Board meetings are held at which all key aspects of the business are discussed including comparison of actual performance with budgets;
• monthly reports are made to the Board by the Chief Executive, Finance Director and other Executive Directors;
• there is a weekly review of operational performance and operational matters by the Executive Directors;
• meetings are held by each Executive Director on a weekly and monthly basis to review the progress of specific financial and non-financial responsibilities within their functions;
• the control, review and monitoring of key business projects by specific steering committees, each headed by an Executive Director who sponsors the project;
• there are defined authorisation levels for capital expenditure;
• there are defined authorisation levels for the placing of orders and contracts;
• there are clear authorisation levels and segregation of accounting duties to control major financial risks;
• daily cash movements are reconciled and monitored by the Treasury Department and the Company's cash flow is monitored monthly in comparison to budget and forecast;
• the Company's reporting systems provide weekly updates on key statistics including sales, production and gross margin analysis;
• a committee comprising Executive Directors meets to identify and review key operational and compliance risks and then implement appropriate procedures to address those risks. A review of the committee's work is included in the Board's agenda;
• major commercial, technological and financial risks are assessed by the Board throughout each financial year. The conclusions are then incorporated in the Company's business strategy and adopted by the Board; and
• there is a formal arrangement for staff to raise any concerns over financial reporting or other matters in confidence.

The Board and Audit Committee review management reports prepared by the external and internal auditors and consider the suitability of suggested improvements to the system of internal controls.

The Board and Audit Committee have reviewed the effectiveness of the internal control system, including financial, operational and compliance controls and risk management, in accordance with the Code on an ongoing basis for the period from 29 June 2008 to the date of this report and have determined that they were not aware of any significant failings or weaknesses in the system of internal control.

Principal risks and uncertainties

As described above in the internal control procedures, key risks are reviewed by the Executive Committee. The assessment of risks on the basis of likelihood and potential impact, together with the controls and actions to manage or mitigate them, are passed to the full Board for approval. The key risks and uncertainties facing the business are considered to be as follows:

A very competitive market

The UK confectionery market has many strong players and maintaining our competitive position depends on our continued ability to offer products that have a strong appeal to consumers. Consumer preferences may shift due to a variety of factors, including changes in demographic and social trends. Any significant shift in consumer preferences coupled with our failure to anticipate and react to such changes could reduce the demand for certain products in our portfolio resulting in reduced sales or harm to the image of our brand. Product innovation is critical to maintaining consumer relevance and hence demand. The Company has a rigorous process for identifying, researching and developing new product ideas, which is regularly reviewed and improved. The Company's multi-channel strategy is also a means by which it can satisfy consumers' needs better than its competitors.

Sales may be disproportionately affected by an economic downturn or recession

We believe that during times of economic uncertainty or hardship consumers may choose to purchase lower value consumer goods as opposed to higher value consumer goods, which include our premium branded chocolates. The current economic climate may also result in the failure of customer businesses or customers defaulting on supply payments. Reduced sales as a result of an economic downturn or recession in the United Kingdom may have an adverse effect on the results of operations of our business.

The company's products are prominent in the national debate on health

Thorntons has always sought to make products with wholesome recipes, for example, only using cocoa butter in its chocolate, in line with other premium confectionery. Developments in food science are monitored directly and via industry associations. Production changes arising from these types of concerns include the phase out of hydrogenated vegetable oil and artificial colours. Thorntons seeks to inform consumers about the strong provenance of its ingredients and beneficial effects of cocoa consumption.

Food products must have the highest integrity

Product contamination, accidental or malicious, is a risk faced by all food producers. Thorntons has extremely rigorous policies and security systems for guarding against accidental or malicious contamination of ingredients or finished products. In the unlikely event that these policies and systems fail, a robust process for product recall and consumer communication, in addition to comprehensive insurance cover is in place.

A substantial decrease in our ability to supply our customers with our products could adversely affect the results of our operations

An interruption or substantial decrease in our ability to supply customers of our brands could damage our sales and image as well as our relationships with customers and consumers. Most of the Company's products for sale are produced at Thornton Park in Alfreton, Derbyshire. The remainder is bought in from suppliers, who have a particular expertise or cost advantage over the Company's own facility. The operating site has been built up over the last 20 years, with varying standards of fire protection. Recognising this vulnerability, the Company invested over £2 million in firewalls and a sprinkler system to improve the protection of the site. Contingency and recovery plans for IT and utilities are also regularly reviewed.

Input prices are driven by commodity markets

The Company buys key inputs forward and works with suppliers to choose the optimal time and quantity for purchases. Whilst this policy may sometimes prevent the Company taking advantage of short-term dips in prices, it provides a sound cost base for the Company to make its trading decisions.

The business is dependent on the skills, enthusiasm and wellbeing of its people

Management evaluates the balance of skills, knowledge and experience within the team when considering the role and capabilities required for a particular senior appointment. The Company uses professional external recruitment specialists as and when appropriate, as well as contacts of its Directors and the Company's advisors. Management aspires to keep colleagues informed of internal and external developments and regularly reviews how they are feeling through surveys and communication sessions. A channel outside the normal line structures for communication and resolution of issues exists through the Joint Industrial Council for Thornton Park and the Retail Council for store-based colleagues.

Relations with shareholders

Communications with shareholders are given high priority. Following the announcement of the Company's interim and final results, the Directors, normally represented by at least the Chairman, Chief Executive and Finance Director, make detailed business presentations to institutional shareholders. The Senior Independent Director is also available to all shareholders. Feedback via the Company's brokers after these regular analyst and shareholder meetings ensures the Board understands shareholder views and messages. Finally, the Company's website, www.thorntons.co.uk/investor, allows shareholders to view Company results and announcements and other relevant information, and also raise questions to put back to the Company.

The Board uses the AGM to communicate with private and institutional investors and welcomes their participation. Each year the Board reviews the governance and voting guidelines issued by the principle representative bodies of its shareholders. The Directors present at each AGM a business review to all attending shareholders who may ask any questions they wish. It is not a requirement that these be previously submitted to the Company in writing. Furthermore, at each AGM, the Chairman aims to ensure that the chairmen of the Board Committees are available. All Code provisions regarding constructive use of the AGM are complied with.

Going concern

The Directors are satisfied, on the basis of current financial projections and facilities available, that the Company and the Group have adequate financial resources to continue to operate for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.

Approved by the Board on 8 September 2009 and signed on its behalf by:

Mark R. Henson
Company Secretary

Tel: 44 (0) 845 121 1911 (Mon-Fri 8.00-20.00 Sat 9.00-16.00)