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The Combined Code on Corporate Governance (the "Code"),  as revised by the Financial Reporting Council in 2006, requires UK listed companies to make a disclosure statement on the application of the Principles and Supporting Principles and compliance with the Provisions of the Code. The Board is committed to the highest standards of Corporate Governance and considers that it has complied in full with the Code throughout the year, except that:

1. no member of the Audit Committee has ‘recent’ financial experience. However, all members have relevant financial experience as senior executives of large corporations; and
2. the notice period for David J. Illingworth, in accordance with his revised contract of employment on his appointment as Chief Executive is up to 24 months from the date of appointment.  Such notice period reduces to 12 months after expiry of the relevant term

The Board further considers that the members of the Audit Committee have the skills and experience of corporate financial matters to discharge properly the Committee's responsibilities. All members of the Audit Committee are independent, as defined by the New York Stock Exchange (“NYSE”), and meet the definition of '‘financial expert' in the Sarbanes-Oxley Act in the US.

In accordance with the Code, the following paragraphs describe Smith & Nephew’s Corporate Governance policies and procedures and how it applies the Principles and Supporting Principles in the Combined Code.

The Company's American Depositary Shares are listed on the NYSE and the Company is therefore subject to the rules of the NYSE as well as the US securities laws and the rules of the US Securities and Exchange Commission (“SEC”) applicable to foreign private issuers. The Board believes that it has complied throughout the year with both SEC and NYSE requirements related to corporate governance except that, to accord with the Combined Code, the Nominations Committee consists of a majority of independent directors and does not consist wholly of independent directors, as required by the NYSE.

The Board of Directors of Smith & Nephew consists of an independent non-executive Chairman, two executive directors and five independent non-executive directors.  In 2007 the Board met on eight occasions and individual attendance together with attendance at Board Committee meetings was:  John Buchanan (8), David Illingworth (8), Adrian Hennah (8), Dr Pamela Kirby (7), Warren Knowlton (7), Brian Larcombe (8), Richard De Schutter (7) and Dr Rolf Stomberg (8).  Sir Christopher O’Donnell attended 5 meetings prior to his retirement in July 2007.  If directors are unable to attend a Board meeting or Committee meeting, they are advised of matters to be discussed and have an opportunity to make their views known to the chairman prior to the meeting.

The Board is responsible for the strategic direction and overall management of the Group and has a formal schedule of matters reserved for its decisions which include the approval of certain policies, budgets, financing plans, large capital expenditure projects, acquisitions, divestments and treasury arrangements.  Otherwise it delegates the executive management of the Group to the Chief Executive and certain specific responsibilities to Board Committees.  It reviews the key activities and performance of the businesses and considers and reviews the work undertaken by the Committees.  Succession planning is regularly reviewed and appropriate measures are taken to ensure the Board has the appropriate balance of skills and experience necessary for a major global medical devices company.

Non – executive directors meet regularly prior to each quarterly Board meeting without management in attendance and the Senior Independent Director meets with the other non-executive directors annually to evaluate the performance of the Chairman.  Board meetings are held at the major business units enabling directors to have a greater understanding of the business and to meet the management of these units.  All directors have full and timely access to all relevant information and, if necessary, to independent professional advice.  Induction programmes are provided for new directors and training is offered to all directors.  In 2007, the Board was updated on the UK tax environment and recent developments.  Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that board and governance procedures are complied with.

Appropriate directors and officers liability insurance is in place and Deeds of Indemnity have been entered into between the Company and directors.  The Deeds of Indemnity allow for indemnification of directors in respect of proceedings bought by third parties and for the Company to provide funds for directors’ ongoing costs in defending a legal action as they are incurred rather than after judgement has been given.  Individual directors would still be liable to pay any damages awarded to the Company in an action against them and to repay their defence costs to the extent funded by the company if their defence is unsuccessful.

Whilst the Chairman and Chief Executive collectively are responsible for the leadership of the Group there is a clear division of respective responsibilities which have been agreed by the Board.  The chairman’s primary responsibility is for leading the Board including setting its agenda and ensuring its effectiveness.  The Chief Executive is responsible for the performance management and supervision of the Group in accordance with the strategy, policies, budgets and business plans approved by the Board.

The Senior Independent Director is Dr Rolf Stomberg, whose role includes consulting with members of the board on issues relating to the Chairman and chairing meetings of the Nominations and Audit Committee in the absence of the chairman or Chairman of the Audit Committee.  He is available to shareholders if they have concerns that cannot be resolved through the normal channels of contact with the Chairman or Chief Executive.

Following the retirement of the Chairman and Group Finance Director in 2006, Dr Stomberg, having served nine years as a director, was asked to continue to serve as a director for up to a further three years.  He brings considerable experience to the Board and acts in an independent and questioning manner at Board meetings.  The Board therefore is of the view that he remains independent.

In 2007, a formal evaluation of the performance of the Board commenced, conducted by an external consultant who is to report back to the Board in mid-2008.  Individual evaluation of the directors is carried out by the Nominations Committee with particular emphasis on the evaluation of those directors standing for re-appointment at the AGM.  The non-executive directors, led by the Senior Independent Director, evaluate the performance of the Chairman.

The Board has determined that none of the non-executive directors or their immediate families has ever had a material relationship with the Group either directly as an employee or as a partner, shareholder or officer of an organisation that have a relationship with the Group.  They are therefore considered independent.  They do not receive additional remuneration apart from directors’ fees, do not participate in the Group’s share options scheme or performance related pay schemes, and are not members of the Group’s pension scheme.  NO director of Smith & Nephew is a director of a company or an affiliate in which any other director of Smith & Nephew is a director.

None of the directors or executive officers (or any relative or spouse of such person, or any relative of such spouse, who has the same address as the director or officer of any subsidiary of Smith & Nephew) have any family relationship with any other directors or the officers nor have a material interest in any contract to which the Company or any of its subsidiaries are or were a party from the beginning of fiscal year 2006 to 12 March 2008.

Details of the Group’s policies on remuneration, service contracts and compensation payments are included in the “Remuneration Report”.

The Board is assisted by the Audit, Remuneration and Nominations committees, each of which has its own terms of reference, which may be found on the Group's website. The Company Secretary is secretary to each of the committees.

The Audit Committee met on six occasions in 2007 (individual attendance is shown in parenthesis). The Committee, consisting entirely of independent non-executive directors, is chaired by Warren D. Knowlton (6). He was appointed to the Committee in February 2001 and became Chairman of the Committee in July 2001. The other members of the Committee are Brian Larcombe (6) who was appointed to the Committee in January 2003, Richard De Schutter (6) who was appointed in February 2001 and Dr Rolf Stomberg (5) who was appointed in February 1998. The Chairman of the Committee reports orally to the Board and minutes of the meetings are circulated to all members of the Board.

The Remuneration Committee, consisting entirely of independent non-executive directors, met five times in 2007 (individual attendance is shown in parenthesis) and is chaired by Dr Rolf Stomberg (5). The other members of the Committee are Dr Pamela Kirby (5), Warren Knowlton (4) and Richard De Schutter (5). The Remuneration Committee sets the pay and benefits of the executive directors and  Executive Officers, approves their main terms of employment and determines share options and long-term incentive arrangements for the Group. It also reviews management succession planning.

The Nominations Committee, consisting of two independent non-executive directors and the Chief Executive, met once in 2007 and it’s Chairman, John Buchanan, and members, Dr Rolf Stomberg and Sir Christopher O’Donnell, attended the meetings.  On his appointment as Chief Executive in July 2007 David J Illingworth replaced Sir Christopher O’Donnell.  The Committee oversees the Board’s plans for succession, recommends appointment to the Board and determines the fees of the non-executive directors.  There is a formal and transparent procedure for the appointment of new directors to the Board.  Candidate profiles are agreed by the Committee before external consultants are engaged to advise on prospective Board appointments.  Shortlisted candidates are interviewed by members of the Committee who then recommend candidates to be interviewed by all members of the Board.  The final decision is made by the Board.  The Senior Independent Director oversees the process for the appointment of a new Chairman.  The process for the appointment of David J. Illingworth as Chief Executive was effected by the whole Board.

Under Smith & Nephew's articles of association, any director who has been appointed by the Board of Directors since the previous annual general meeting of shareholders, either to fill a casual vacancy or as an additional director, holds office only until the next annual general meeting and then is eligible for reappointment by the shareholders. Subsequently, directors retire and offer themselves for re-election at the third annual general meeting after the meeting at which they were last reappointed. The directors are subject to removal with or without cause by the Board of Directors or the shareholders. Executive Officers serve at the discretion of the Board of Directors.

Dr Rolf Stomberg who has served more than nine years as a director of the Company will retire at the annual general meeting to be held in May 2008 and, being eligible, will offer himself for re-election.  In accordance with the articles of association, John Buchanan, Dr Pamela Kirby and Brian Larcombe will retire and, being eligible will offer themselves for re-election at the AGM.