Principles
The Board is committed to the highest standards of corporate governance. Throughout the year, Invensys has been in full compliance with the provisions of the Combined Code appended to the Listing Rules of the UK Listing Authority ('the Code') and the following describes how the Principles set out in the Code have been applied.

The Board
The Board currently has nine members, comprising seven non- executive directors, including the Chairman, and two executive directors. There is a clear division of responsibility between the Chairman and the Chief Executive which ensures that there is a balance of power and authority. All the non-executive directors are regarded as independent. Sir Graham Hearne is the Senior Independent Director. The biographies of all the directors are presented on the Board of Directors section. As can be seen, they have a wide range of international business and financial experience relevant to the direction of a large global company.

Although all the directors have an equal responsibility for the performance of Invensys, the role of the non-executive directors is particularly important in ensuring that the strategies proposed by the executive management are fully discussed and rigorously examined and take account of the long-term interests, not only of the shareholders, but also of employees, customers, suppliers and the many communities in which Invensys conducts business.

The Board meets at least eight times during the course of the year with additional meetings convened as necessary; in the course of the year under review, the Board met on 13 occasions, including two strategy meetings. There is a formal schedule of matters reserved for the decision of the Board and the terms of reference of the Board and its committees are regularly reviewed. To enable the Board to perform its duties, all directors have full and timely access to all relevant information and to the services of the Company Secretary. Each director is required to retire by rotation no later than the third annual general meeting following his or her appointment or re-appointment.

The Board Committees
The Board has three standing committees:

The Nominating Committee is responsible for monitoring the performance of directors, ensuring appropriate training of individual directors and/or the Board as a whole and making recommendations to the Board for the appointment or re-appointment and removal of directors. It has four non-executive members: Lord Marshall (who chairs the Committee), Mr Robert Bauman and Sir Philip Beck, who served during the year, and Sir Graham Hearne, who was appointed on 14 June 2002.

The Audit Committee is composed of four independent non- executive directors: Sir Graham Hearne (who was appointed Chairman of the Committee on 1 April 2002), Mr Robert Bauman, Mr Rolf Börjesson and Mr Larry Farmer (appointed 1 March 2002). Mr Hugh Collum served as Chairman of the Committee during the year under review until 31 March 2002, when he stepped down from the Board. It meets at least three times a year to review published financial information, and the effectiveness of external and internal audit and the Group's internal controls and risk management procedures. The Chief Executive, the Chief Financial Officer and the external auditors normally attend the meetings and there is a meeting at least once a year between the Committee and the external auditors at which management is not present. This is particularly valuable in providing a direct line of communication between the external auditors and the non-executive directors.

The Committee reviews the work undertaken by the external auditors going beyond the scope of the audit itself to ensure that the independence of the auditors is not impaired. The review covers the nature of the work, the method of appointment and the fees paid.

In addition to these procedures, the directors and Audit Committee review specific areas of work carried out by Ernst & Young LLP, which generally fall into either of the following categories:

• Audit and assurance — this includes work that in their role as auditors they are best placed to undertake. This comprises formal reporting and other work related to borrowings, shareholder and other circulars, various regulatory reports and work in respect of acquisitions and disposals.
• Taxation — the auditors are used in cases where they are best suited, such as tax provision and statutory work. Other significant tax advisory projects are put out to competitive tender.

All significant management consulting projects are put out to competitive tender. In 2000 Ernst & Young disposed of its management consulting business and as a result our auditors do not carry out such work for the Group. The auditors also report to the directors and the Audit Committee on the actions they take to comply with all the appropriate professional and regulatory requirements designed to ensure their independence. See note 4 on page 55 of the accounts for details of payments made to Ernst & Young LLP [PDF 1.5MB].

The Audit Committee also reviews the work undertaken by the Risk Committee that is described in more detail in the section of this report dealing with internal control.

The Remuneration Committee comprises three independent non-executive directors: Mr Rolf Börjesson (Chairman of the Committee from 1 April 2002), Sir Philip Beck and Mr Larry Farmer (appointed 1 March 2002). Sir Graham Hearne served as Chairman of the Committee during the year under review until 31 March 2002, when he became Chairman of the Audit Committee. The role and responsibilities of the Committee are described in the Board's remuneration report on pages 39 to 42 [PDF 1.5MB].

Communication with shareholders
Communication with all shareholders is given a high priority and a number of means is used to promote greater understanding and dialogue with investment audiences. These are reviewed with the Board and audited through independent research.

The summary financial statement provides shareholders with the material information concerning Invensys in a form more readily assimilated than the full annual report and accounts. Shareholders can also request the full report. At the half year an interim report is published. All of these documents are available online through the Invensys website, www.invensys.com, together with details of all announcements, analyst presentations and share price information.

During the year, shareholders are kept informed of the progress of the Company through trading statements and other announcements of significant developments that are released through the London Stock Exchange and other news services. There is regular dialogue with institutional shareholders and participation in sector conferences. Shareholders can also raise questions directly with the Company at any time of the year through a facility on the website.

Additionally, there is an opportunity at the annual general meeting for individual shareholders to question the Chairman and the chairmen of the Audit, Remuneration and Nominating Committees. Last year, Sir Graham Hearne, the current Chairman of the Audit Committee, deputised in this role for his predecessor who was unable to attend the meeting. The report and accounts are sent to shareholders at least 20 working days prior to the annual general meeting.

During the year, Invensys was pleased to be voted 'Best Company Investor Relations by Sector' in the Investor Relations Magazine Awards, held in association with the Financial Times.

Internal control
In accordance with the Guidance for Directors on Internal Control, the Board reports on its reviews of internal control which include consideration of the effectiveness of identification, evaluation and management of all significant risks affecting Invensys.

The Board has ultimate responsibility for the system of internal control. Each division is individually accountable to the Chief Executive and is managed by a Chief Operating Officer who, with its senior management team, provides day-to-day control over the division's operations within the strategic guidelines and delegated authorities adopted by the Board.

The internal control system is designed to meet the Group's particular needs and the risks to which it is exposed; but it should be appreciated that, however effective a system of internal control is, it can provide only reasonable and not absolute assurance against material misstatement or loss. In the following paragraphs the directors consider the key components of the Group's system of internal control and the process by which they have reviewed the effectiveness of such controls.

Overall strategy on risk and control - The Risk Committee comprises the Chief Financial Officer (who chairs the committee), the Chief Executive, the Vice President Finance — Invensys Inc., the General Counsel, the Deputy Chief Financial Officer, the Vice President Risk Management, the Director of Internal Audit and the Company Secretary. Its principal purpose is to provide further assurance to the Audit Committee and the Board. During the year, its activities have included reviewing the Group's risk framework and its monitoring functions and assessing all major risks together with their related risk management responses and, where appropriate, corrective programmes. The Risk Management Strategy is established and monitored by the Board with the objective of setting clear guidelines in relation to the levels of retained risk acceptable to the Group. Procedures for the Group-wide assessment of all business risks are subject to continuous review, monitoring and improvement.

Risk management - The internal risk management function reports to the Chief Financial Officer and is responsible for assessing the Group's exposure to risk in such areas as product liability and making appropriate policy recommendations to the Board and monitoring compliance with policies adopted by the Board. Responsibility for health, safety, the environment and property rests with the Senior VP, Human Resources and Group Services, who reports to the the Chief Executive. More details regarding this area are included on the sustainable development section. The legal function, which reports to the Chief Executive, also monitors and acts on specific legal issues, legal claims and litigation.

Operating controls - Controls are detailed in formal procedures, instructions and manuals and compliance is verified by the Group's internal auditors and (to the extent necessary to form their opinion on the truth and fairness of the annual accounts) by the external auditors. Senior managers are required annually to certify compliance with the Group's financial and operational procedures and controls, including environmental and health and safety matters, and in relation to compliance with the Group's legal and ethical conduct policy.

Internal audit - The scope of the internal audit function encompasses the examination and evaluation of the adequacy and effectiveness of the Group's system of internal financial control and the assurance that certain performance criteria have been met. The function reports to the Audit Committee and the Board.

Audit Committee and Board review of internal control - The Audit Committee reviews reports from executive management, the Risk Committee, internal and external auditors to obtain reasonable assurance that appropriate control procedures are in place and being adhered to and reports on all these matters to the Board. In the Board's view the information that it has received throughout the year and the procedural framework that is in place are sufficient to enable it to review the effectiveness of the Group's system of internal control in accordance with the Guidance for Directors on Internal Control.

Sustainability and social, environmental and ethical matters
The Board attaches high importance to sustainable development and the Invensys Intent that is the foundation of our corporate behaviour as described on the sustainable development section. The risks inherent in these matters are assessed as part of the Group's overall risk management processes. Accordingly, the Board, through the Audit and Risk Committees, receives regular information and reports to enable it to make appropriate assessments in these areas. Performance management, incentivisation and training procedures are being continuously developed so as to reflect more fully the Invensys Intent. The processes required to achieve appropriate assurance and verification across all aspects of these matters are not fully developed but it is the policy of Invensys that over time its success in meeting all the elements of the Invensys Intent should be measurable and transparent.