Accountability

Capital events during 2007

During 2007 total dividends of 20.8p per ordinary shares were paid to shareholders, including a special dividend of 8.0p per share. In addition, in December 2007 there was an issue of B Shares to shareholders, worth 22.4p per ordinary share, and an associated consolidation of each nine ordinary shares of 25p nominal value into eight ordinary shares of 28.125p nominal value. Holders of options and of PSP and LTIP awards did not receive the special dividend or an issue of B Shares. Both the special dividend and the return of capital were intended to enhance future returns on equity, an important focus of management in the interests of shareholders. After careful consideration of the small theoretical transfer of value from shareholders to option and award holders resulting from the share consolidation (estimated to be less than 0.1% of shareholder value), and with the benefit of independent advice, the Committee decided not to adjust the numbers of shares under option or the exercise prices per share of any of the Company’s share option or long term incentive plans. Nor did it do so as a result of the earlier special dividend, which could be regarded as a transfer of value in the opposite direction. Hence what were options at a particular price per share over a particular number of ordinary shares prior to the consolidation remained options over the same number of shares at the same exercise price per share following the consolidation. This led to the number of shares over which there were options to acquire new shares to increase from 1.45% of the shares in issue immediately prior to the announcement of the share consolidation to 1.63% immediately after. More details of the use of shares for incentive plans are set out in the immediately following section.

In the case of the SIP, participants received taxable B Share initial dividends (the SIP not being permitted to accept redemption), and had their ordinary shares consolidated.

Executive options’ TSR performance

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Utilisation of new shares

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ESOT shares currently committed

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Use of unissued and existing shares for incentive plans

The rules of all the Company’s incentive plans which can result in the issue or transfer of shares to participants include limits on the overall number of unissued shares over which options may be granted. The only employee schemes under which unissued shares are committed to be issued are the executive share option schemes and the Sharesave scheme. Options over unissued shares are also intended to be granted in the future under the replacement Sharesave scheme being proposed to shareholders at the 2008 AGM and new shares were issued in 2007 to the trustee of the Share Incentive Plan as SIP Free Shares. Shares awarded under the PSP and LTIP are intended to be satisfied from shares held, or to be purchased, by the Group’s Employee Share Ownership Trust (ESOT).

Grants of options over new shares under any selective plan, after deducting any such options which have lapsed, are limited to 5% of the issued share capital in any 10 year period. Grants over new shares under any scheme are also limited to 5% over five years and to 10% over 10 years. The percentages of the year end shares in issue, together with the equivalent percentages a year earlier (of a larger number of issued shares prior to the share consolidation), relating to each of these limits are shown in the middle table above.

All scheme utilisation figures in the table include 533,940 shares issued in April 2007 to Yorkshire Building Society as trustee of the SIP. The SIP’s holding had reduced by 31 December 2007 to 461,352 shares (2006: nil) as a result of the share capital consolidation and withdrawals from the SIP.

In addition, the shares set out in the third table above were committed at the year end to be transferred to participants by the trustee of the ESOT, subject, where applicable, to the future fulfillment of performance conditions.

Of the total potential commitment of the ESOT as at 31 December 2007, it then held 1,064,470 shares (2006: 774,579 against a commitment of 1,591.541). It is intended that the balance will be purchased in the market by the ESOT, as necessary using funds advanced by the Company, before they are required. The changes in the shares held by the ESOT during 2007 resulted from the exercises of options and vesting of awards over a total of 127,050 shares, the purchase by the ESOT in the market of a total of 550,000 shares and a reduction in the number of shares held as a result of the share consolidation in December 2007. Following receipt of the B Share redemption proceeds in January 2008, it used the proceeds, plus other cash resources, to purchase a further 214,694 shares in the market. Taking account of exercises up to 25 February 2008, the ESOT’s shareholding is 1,279,164 shares.

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