Chairman's introduction

The UK Corporate Governance Code

The Board attaches the highest priority to corporate governance, the system by which the Company is directed, managed and controlled in the interests of all its stakeholders. The strength of the Company’s corporate values, its reputation and its ability to achieve its objectives are influenced by the effectiveness of the Company’s approach towards corporate governance.

In May 2010, the Financial Reporting Council introduced changes to the Combined Code, which will now be known as the UK Corporate Governance Code, to help company boards become more effective and more accountable to their shareholders. Changes include a clearer statement of the board’s responsibilities relating to risk, a greater emphasis on the importance of getting the right mix of skills and experience on the board, and a recommendation that all directors of FTSE 350 companies be re-elected annually.

The Board has carefully considered the changes made to the Combined Code and intends to comply fully.

Proposed arrangements for the creation of a new holding company

The Company is proposing a change to its corporate structure in order to generate appropriate reserves which will allow it to continue its progressive shareholder payment policy and the Company’s practice of providing cash returns to shareholders in the most efficient manner through the issue and redemption of C Shares. The restructuring proposals will create a new non-trading Group holding company (New Holdco) which will be incorporated under the laws of England and Wales and have a premium listing on the London Stock Exchange’s main market for listed securities.

The new corporate structure will be implemented by means of a Scheme of Arrangement (Scheme) under Part 26 of the Companies Act 2006 followed by a reduction of capital of New Holdco. Under the terms of the Scheme, shareholders will exchange ordinary shares in Rolls-Royce Group plc for shares in New Holdco on a one-for-one basis. The Scheme will provide greater flexibility in the capital structure of the Group and provide distributable reserves to New Holdco. Approval will be sought from shareholders for these proposals at the time of the Group’s annual general meeting (AGM) on May 6, 2011 and the Scheme will also require the sanction of the High Court.