Annual report and accounts 2008

The present members of the board, together with their biographical details, are shown here. Details of directors’ remuneration, interests and dealings in ordinary shares and options of the company are contained in the report on directors’ remuneration.

This year, and in future years, in accordance with good corporate governance, the board has resolved that all directors should offer themselves for re-election on an annual basis at the company’s annual general meeting (AGM). Accordingly, all of the directors will offer themselves for re-election, or reappointment in the case of directors who were appointed since the last meeting, at the forthcoming AGM on 1 May 2009.

Details of directors’ service contracts can be found here .

No director was materially interested in any contract of significance to the company’s business.

Introduction
A detailed account of how we comply with the provisions of the Combined Code on Corporate Governance (the Code) can be found on our website at www.pearson.com/

The board believes that we are in full compliance with the Code since our personnel committee returned to its full complement of independent non-executive directors with Ken Hydon’s appointment on 3 October 2008.

Composition of the board
The board consists of the chairman, Glen Moreno, six executive directors including the chief executive, Marjorie Scardino, and six independent non-executive directors. David Bell, our director for people, will be stepping down at the forthcoming AGM. The board will then consist of a majority of independent non-executive directors.

Senior independent director
Terry Burns was appointed as our senior independent director in 2004. His role includes being available to shareholders if they should have concerns that have not been addressed through the normal channels, and attending meetings with shareholders in order to gain a balanced understanding of any concerns that they might have. The senior independent director also meets with the non-executive directors at least once a year in order to appraise the performance of the chairman, and would be expected to chair the nomination committee in the event that it was considering succession to the role of chairman of the board.

Independence of directors
The assessment of Terry Burns’ independence was given particular consideration by the board as he has now served on the board for more than nine years.

The board believes that due to his strength of character, experience and knowledge, Terry continues to be highly effective as a non-executive director. He provides objective and rigorous challenges to, and engages in constructive debate with, the board and the committees on which he sits. Terry also brings a wealth of useful and relevant experience both in his position as a non-executive director and as the senior independent director.

Accordingly, the chairman has asked Terry to remain on the board. The board believes that it is in the shareholders’ best interests for Terry Burns to be re-elected as an independent non-executive director.

The board is aware that Patrick Cescau was appointed as a non-executive director of Tesco plc on 1 February 2009 and that Ken Hydon was at the same time, and remains, a non-executive director of Tesco plc. The board believes that these directorships should not affect either Patrick Cescau or Ken Hydon’s status as independent non-executive directors of Pearson.

Conflicts of interest
No director has any conflict of interest which has not been disclosed to the board in accordance with the company’s Articles of Association.

The board meets six times a year and at other times as appropriate. The following table sets out the attendance of our directors at the board and committee meetings during 2008:

Δ Appointed to the board on 1 May 2008.
†Appointed to the personnel committee on 3 October 2008.
•Appointed to the nomination committee on 3 October 2008.

The role and business of the board

The board receives timely, regular and necessary financial, management and other information to fulfil its duties. Directors can obtain independent professional advice at the company’s expense in the performance of their duties as directors. All directors have access to the advice and services of the company secretary.

In addition to these formal roles, we endeavour to give the non-executive directors access to the senior managers of the business via involvement at both formal and informal meetings. In this way we hope that the experience and expertise of the non-executive directors can be utilised for the benefit of the company. At the same time, this practice enables the non-executive directors to develop an understanding of the abilities of senior management which will help them judge the company’s prospects and plans for succession.

Board evaluation As signposted last year, in early 2008 the chairman asked each of the directors to complete an evaluation questionnaire on the board and each of its committees.

Following the responses to this questionnaire, the chairman reported his findings to the board at the April board meeting.

In early 2009 the chairman will again ask the directors to complete an evaluation questionnaire which this time will be targeted specifically around issues of strategy and risk management. Responses to this questionnaire and from face-to-face meetings with the chairman will be gathered and communicated to the board at a forthcoming meeting.

Each of the board committees were also asked to complete evaluation questionnaires.

During the course of the year the executive directors were evaluated by the chief executive on their performance against personal objectives under the company’s standard appraisal mechanism. The chairman leads the assessment of the chief executive and the senior independent director conducts a review of the chairman’s performance.

Directors’ training
Directors receive a significant bespoke induction programme and a range of information about the company when they join the board.

This includes background information on Pearson and details of board procedures, directors’ responsibilities and various governance-related issues, including procedures for dealing in Pearson shares and their legal obligations as directors. The induction also includes a series of meetings with members of the board, presentations regarding the business from senior executives and a briefing on Pearson’s investor relations programme. We supplement the existing directors’ training programme through continuing presentations about the company’s operations at board meetings and by encouraging the directors to visit operating companies and local management. Externally run courses are also made available should directors wish to make use of them.

Directors’ indemnities
The company grants an indemnity to all of its directors in accordance with section 232 of the Companies Act 2006 in relation to costs incurred by them in defending any civil or criminal proceedings and in connection with an application for relief under section 144(3) or (4) or section 727 of the Companies Act 1985, so long as it is repaid not later than when the outcome becomes final if: (i) they are convicted in the proceedings; (ii) judgement is given against them; or (iii) the court refuses to grant the relief sought.

The company has purchased and maintains directors’ and officers’ insurance cover against certain legal liabilities and costs for claims in connection with any act or omission by such directors and officers in the execution of their duties.

Dialogue with institutional shareholders
There is an extensive programme for the chairman, CEO, executive directors and senior managers to meet with institutional shareholders. The non-executive directors meet informally with shareholders both before and after the AGM, and respond to shareholder queries and requests. The chairman and senior independent director make themselves available to meet any significant shareholder as required. Makinson Cowell and the company’s investor relations department report to the board on the results of an extensive survey on major shareholders’ views.

Furthermore, reports on changes in shareholder positions and views are given to the directors at every board meeting.

The board has established three committees: the audit committee, the personnel committee and the nomination committee. Chairmen and members of these committees are appointed by the board on the recommendation (where appropriate) of the nomination committee and in consultation with each requisite committee chairman.

Ken Hydon Audit committee chairman

Members

Ken Hydon, David Arculus, Patrick Cescau and Susan Fuhrman

All of the audit committee members are independent non-executive directors and have financial and/or related business experience due to the senior positions they hold or held in other listed or publicly traded companies and/or similar public organisations. Ken Hydon, chairman of the committee, is our designated financial expert.

The committee has written terms of reference which clearly set out its authority and duties. These are reviewed annually and can be found on the company website at www.pearson.com

The committee has been established by the board primarily for the purpose of overseeing the accounting, financial reporting, internal control and risk management processes of the company and audits of the financial statements of the company.

The committee is responsible for assisting the board’s oversight of the quality and integrity of the company’s external financial reporting and statements and the company’s accounting policies and practices. The Group’s internal and external auditors have direct access to the committee to raise any matter of concern and to report on the results of work directed by the committee. The committee reports to the full board on a regular basis but no less frequently than at every board meeting immediately following a committee meeting. It also reviews the independence of the external auditors, including services supplied, and ensures that there is an appropriate audit relationship. Based on management’s recommendations, the committee reviews the proposal to reappoint the external auditors at its February meeting.

The committee met four times during the year with the chief financial officer, head of internal audit and other members of the senior management team, together with the external auditors, in attendance. The committee also met regularly in private with the external auditors and the head of internal audit. Some members of the committee attended site visits to a number of overseas locations in order to better understand how Group policies are embedded in operations.

The committee receives regular technical updates as well as specific or personal training as required.

At every meeting, the committee considered reports on the activities of the internal audit function, including the results of internal audits, risk reviews, project assurance reviews, and fraud and whistleblowing reports. The committee also monitored the company’s financial reporting, internal controls and risk management procedures and considered any significant legal claims and regulatory issues in the context of their impact on financial reporting.

In addition, the committee considered the following matters during the course of the year:

28 February 2008

24 April 2008

23 July 2008

11 December 2008

David Arculus Personnel committee chairman

Members

David Arculus, Terry Burns, Ken Hydon and Glen Moreno

The committee has responsibility for determining the remuneration and benefits packages of the executive directors, the chief executives of the principal operating companies and other members of the management committee, as well as recommending the chairman’s remuneration to the board for its decision.

The committee takes independent advice from consultants when required. No director takes part in any discussion or decision concerning their own remuneration. The committee reports to the full board and its report on directors’ remuneration, which has been considered and adopted by the board, is set out here.

The committee met four times during the year, and has written terms of reference which clearly set out its authority and duties. These can be found on the company website at www.pearson.com

Glen Moreno Nomination committee chairman

Members

Glen Moreno, Marjorie Scardino, David Arculus, Terry Burns, Patrick Cescau, Susan Fuhrman, Ken Hydon and CK Prahalad

The nomination committee meets as and when required. The committee primarily monitors the composition and balance of the board and its committees, and identifies and recommends to the board the appointment of new directors.

When considering the appointment of a new director the committee reviews the current balance of skills and experience of the board.

During 2008 the committee met to consider the appointment of two new directors to the board: Will Ethridge as an executive director and CK Prahalad as an independent non-executive director. Both directors joined the board on 1 May 2008. The committee also met to consider the appointment of a new member to the personnel committee, resulting in the appointment of Ken Hydon on 3 October 2008.

Whilst the chairman of the board chairs this committee he is not permitted to chair meetings when the appointment of his successor is being considered or during a discussion regarding his performance.

The committee has written terms of reference which clearly set out its authority and duties. These can be found on the company website at www.pearson.com

The board of directors has overall responsibility for Pearson’s system of internal control, which is designed to manage the risks facing the Group, safeguard assets and provide reasonable, but not absolute, assurance against material financial misstatement or loss.

In accordance with the provisions of the Code, the directors confirm that they have reviewed the effectiveness of the Group’s internal control system.

They also confirm that there is an ongoing process allowing for the identification, evaluation and management of significant business risks. This process accords with the revised Turnbull guidance and has been in place throughout 2008 and up to the date of approval of this annual report.

The Group’s internal control framework covers financial, operational and compliance risks. Its main features are described below:

i Board
The board of directors exercises its control through an organisational structure with clearly defined levels of responsibility and authority and appropriate reporting procedures. To maintain effective control over strategic, financial, operational and compliance matters the board meets regularly, and has a formal schedule of matters that is brought to it, or its duly authorised committees, for attention. Responsibility for monitoring financial management and reporting, internal control and risk management has been delegated to the audit committee by the board. At each meeting, the audit committee considers reports from management, internal audit and the external auditors, with the aim of reviewing the effectiveness of the internal financial and operating control environment of the Group.

ii Operating company controls
The identification and mitigation of major business risks is the responsibility of operating company management. Each operating company, including the corporate centre, maintains internal controls and procedures appropriate to its structure and business environment, whilst complying with Group policies, standards and guidelines. These controls include those over external financial reporting which are documented and tested in accordance with the requirements of section 404 of the Sarbanes-Oxley Act, which is relevant to our US listing.

iii Financial reporting
There is a comprehensive strategic planning, budgeting and forecasting system with an annual operating plan approved by the board of directors. Monthly financial information, including trading results, balance sheets, cash flow statements and indebtedness, is reported against the corresponding figures for the plan and prior years, with corrective action outlined by operating company executives as appropriate. Group senior management meet, on a quarterly basis, with operating company management to review their business and financial performance against plan and forecast. Major business risks relevant to each operating company as well as performance against the stated strategic objectives are reviewed in these meetings.

In addition, the chief executive prepares a monthly report 11 times a year for the board on key developments, performance and issues in the business.

iv Risk management
Operating companies undertake formal, semi-annual risk reviews to identify new or potentially undermanaged risks. The results of these reviews are submitted to group internal audit for evaluation and onward reporting to the board, in summary, and in more detail via the audit committee. Throughout the year, risk sessions facilitated by the head of group internal audit are held with operating company management and with the Pearson Management Committee to discuss and review the significant risks facing the business.

v Internal audit
The Group internal audit function is responsible for providing independent assurance to management on the effectiveness of internal controls. The annual internal audit plan, derived from a risk model, is approved by the audit committee. Recommendations to improve internal controls and/or to mitigate risks are agreed with operating company management after each audit. Formal follow-up procedures allow Group internal audit to monitor operating companies’ progress in implementing its recommendations and to resolve any control deficiencies. The Group internal audit function also has a remit to monitor significant Group projects, in conjunction with the central project management office, to provide assurance that appropriate project governance and risk management strategies are in place. Regular reports on the work of internal audit are provided to executive management and, via the audit committee, to the board.

The head of group internal audit is jointly responsible with the group legal counsel for monitoring compliance with our Code of Business Conduct, and investigating any reported incidents including fraud allegations.

vi Treasury management
The treasury department operates within policies approved by the board and its procedures are reviewed regularly by the audit committee. Major transactions are authorised outside the department at the requisite level, and there is an appropriate segregation of duties. Frequent reports are made to the chief financial officer and regular reports are prepared for the audit committee and the board.

vii Insurance
Insurance is provided through Pearson’s insurance subsidiary or externally, depending on the scale of the risk and the availability of cover in the external market, with the objective of achieving the most cost-effective balance between insured and uninsured risks.

Having reviewed the Group’s liquid resources and borrowing facilities, and the Group’s 2009 and 2010 cash flow forecasts, the directors believe that the Group has adequate resources to continue as a going concern. For this reason, the financial statements have, as usual, been prepared on that basis.

Pearson has an extensive programme of communication with all of its shareholders – large and small, institutional and private. We also make a particular effort to communicate regularly with our employees, a large majority of whom are shareholders in the company. We post all company announcements on our website, www.pearson.com, as soon as they are released, and major shareholder presentations are made accessible via webcast or conference call. Our website contains a dedicated investor relations section with an extensive archive of past announcements and presentations, historical financial performance, share price data and a calendar of events. It also includes information about all of our businesses, links to their websites, and details of our corporate responsibility policies and activities.

We have an established programme of educational seminars for our institutional shareholders focusing on individual parts of Pearson.

The seminars are available to all shareholders via webcast on www.pearson.com

Our AGM – which will be held on 1 May this year – is an opportunity to meet the company’s managers, hear presentations about Pearson’s businesses and the previous year’s results as well as to conduct general AGM business.

Details of share issues are given in note 27 to the accounts here. The company has a single class of shares which is divided into ordinary shares of 25p each. The ordinary shares are in registered form. The company’s current authorised share capital is £299,500,000 comprising 1,198,000,000 ordinary shares of which 809,276,583 were issued as at 31 December 2008. At the AGM held on 25 April 2008, the company was authorised, subject to certain conditions, to acquire up to 80 million of its ordinary shares by market purchase. Shareholders will be asked to renew this authority at the AGM on 1 May 2009.

At 27 February 2009, the company had been notified of the following substantial shareholdings in the capital of the company.

The notice convening the AGM to be held at 12 noon on Friday, 1 May 2009 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE, is contained in a circular to shareholders to be dated 26 March 2009.

In accordance with section 489 of the Companies Act 2006 a resolution proposing the reappointment of PricewaterhouseCoopers LLP (PwC) as auditors to the company will be proposed at the AGM, at a level of remuneration to be agreed by the directors.

In line with best practice, our relationship with PwC is governed by our external auditor policy, which is reviewed and approved annually by the audit committee. The policy establishes procedures to ensure the auditors’ independence is not compromised as well as defining those non-audit services that PwC may or may not provide to Pearson. These allowable services are in accordance with relevant UK and US legislation.

Services provided by PwC above these limits and all other allowable non-audit services, irrespective of value, must be approved by the audit committee. Where appropriate, services will be tendered prior to awarding work to the auditor.

In 2007, Interactive Data appointed Ernst & Young LLP (Ernst & Young) as its independent auditor. To maintain Ernst & Young’s independence we have restricted the services that Ernst & Young can provide to Pearson and its subsidiaries, similar to those restrictions which we place on PwC.

The audit committee receives regular reports summarising the amount of fees paid to the auditor.

A full statement of the fees for audit and services is provided in note 4 to the accounts here .

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. In preparing these financial statements, the directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB). The financial statements are required by law to give a true and fair view of the state of affairs of the company and the Group and of the profit or loss of the Group for that period.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and the Group and to enable them to ensure that the financial statements and the report on directors’ remuneration comply with the Companies Acts 1985 and 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors also confirm that, for all directors in office at the date of this report:

a) so far as the directors are aware, there is no relevant audit information of which the company’s auditors are unaware; and

b) they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information.

Approved by the board on 6 March 2009 and signed on its behalf by

Philip Hoffman Secretary