Corporate Governance

Directors' Statement on Corporate Governance 2008

The following statement has been extracted from the Spirent Communications plc Annual Report 2008.

Compliance

This statement describes how the principles and provisions as set out in the Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2006 (the “Code”) have been applied within the Group during 2008.

The Board

As at 31 December 2008, the Board comprised a chairman, four independent non-executive directors, one non-executive director not classified as independent for the purposes of the Code when determining the composition of the Board or its Committees, and two executive directors, details of whom are provided on page 21. The Board operates within a framework of controls including a formal schedule of matters specifically reserved for its decision. At an Extraordinary
General Meeting held on 22 December 2006 (“2006 EGM”) shareholders elected Edward Bramson as a director of the Company, following which the Board elected him as Chairman. Mr Bramson assumed responsibility for the management of the Group by becoming Executive Chairman on 7 March 2007. At that point in time, as there was no longer a separation of the chairman and chief executive roles, Code Provision A.2.1. was breached. Although Mr Bramson performed a critical role during the strategic review and reorganisation of the Group, the Board considered that, given the balance of non-executive directors, no single individual dominated its decision making. However, on 6 November 2008 Bill Burns was appointed as Chief Executive Officer resulting in a separation of the chairman and chief executive roles and renewed compliance with this Code provision.

The Board discharges its responsibilities by providing leadership of the Company within a framework of prudent and effective controls, which enables risk to be assessed and managed. It sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives, and reviews management performance. It also defines the Company’s values and standards and ensures that its obligations to its shareholders are understood and met.

The independence of each director is reviewed at least annually. The Board determined that, within the terms of the Code, Ian Brindle, Duncan Lewis, Tom Maxwell and Alex Walker are all independent non-executive directors. As Edward Bramson and Gerard Eastman have a connected material notifiable interest in the issued Ordinary Share capital of the Company (see the Report of the directors on pages 22 to 25), the Board has concluded that they should not be considered independent of the Company. Details of other professional commitments of the Chairman and non-executive directors are provided in their biographies on page 21.

The Company adopted new Articles of Association which were approved by shareholders at the Company’s 2008 Annual General Meeting (“2008 AGM”) with effect from 1 October 2008. The new Articles of Association permit the Board to consider and, if it sees fit, to authorise situations where a director has an interest that conflicts, or may possibly conflict, with the interests of the Company (“situational conflicts”). The Board has a formal system in place for directors to declare situational conflicts and for these to be considered for authorisation by those directors who have no interest in the matter being considered. In deciding whether to authorise a situational conflict, these non-conflicted directors are required to act in the way they would consider would be most likely to promote the success of the Company and they may impose limits or conditions when giving authorisation, or subsequently, if they think this is appropriate.

Alex Walker currently serves as the Senior Independent Non-Executive Director. The Senior Independent Non-Executive Director is available to meet shareholders upon request if they have concerns which contact through the normal channels (the Chairman or an executive director) has failed to resolve, or for which such contact would be inappropriate.

It is Company policy to hold at least four Board meetings a year. There were seven Board meetings during 2008. The agenda is settled by the Chairman in advance of the meeting and Board papers are circulated to Board members several days ahead of any meeting. Minutes of previous meetings are circulated to all Board members and approved at the next Board meeting.

Full attendance of the Board is expected at meetings and in 2008 all directors attended all seven meetings except Duncan Lewis, who missed two meetings due to unavoidable diary conflicts. Where the director was absent, full documentation for the meeting was issued and briefings were provided as appropriate. Where a director was absent it was ensured that any comments on the documentation or subject matter to be considered were passed to the Board, as appropriate, for consideration.

Certain of the matters specifically reserved for the Board’s decision have been delegated to three Committees with clearly defined terms of reference which, together with the composition of each Committee, are reviewed annually.

The terms of reference for the Audit, Remuneration and Nomination Committees can be found on the Company’s website at www.spirent.com.

The Chairman is responsible for ensuring that the directors receive accurate, timely and clear information. They receive regular updates on business performance and receive presentations from the executive directors and other senior managers at Board meetings. Directors are encouraged to update their skills continually and their knowledge of the Company required to fulfill their role both on the Board and on Board Committees. Under the direction of the Chairman, the Company Secretary ensures good and timely information flows within the Board and its Committees and makes sure that Board procedures are complied with. The Company Secretary also updates and advises the Board on all regulatory and governance matters.

There is a policy whereby the non-executive directors and the Board Committees may take independent professional advice at the Company’s expense in order to fulfill their duties. All directors also have access to the advice and services of the Company Secretary, whose removal may be effected only with the approval of the Board.

Board Appointments and Induction

The Board has in place a procedure for the appointment of new directors to the Board which is in compliance with the Code and this procedure was applied in relation to the appointment of Bill Burns during 2008.

The Company’s Articles of Association require that all directors seek election by shareholders at the first annual general meeting following their appointment and as a result, Bill Burns will offer himself for election at the 2009 Annual General Meeting (“2009 AGM”). They also require that all directors seek re-election at least every three years and therefore, Ian Brindle and Alex Walker will offer themselves for re-election at the 2009 AGM. Notwithstanding the requirements of the Company’s Articles of Association, Edward Bramson and Gerard Eastman have agreed to offer themselves for re-election at each annual general meeting whilst they serve on the Board and will, therefore, also offer themselves for re-election at the 2009 AGM.

On appointment to the Board and its Committees all directors receive an induction tailored to their individual requirements. New directors are briefed on their legal and other duties and obligations as directors of a UK listed company. Visits to different facilities and meetings with senior management are organised, as appropriate, to assist the new director in developing an understanding of how the Group operates and the key issues that it faces.

Performance Evaluation

Performance evaluation of the Board and its Committees was carried out during the year by directors completing questionnaires and the results being collated and analysed by the Company Secretary, who prepared a report for Board discussion. The Board discussion concluded that the Board and Committees operated well and were effective.

The Chairman communicates regularly with the non-executive directors and this contact provides an opportunity to assess performance and to raise any questions regarding the performance of the executive directors or in respect of any other matters. The Chairman concluded that during the year the quality and commitment of the non-executive directors was high. The Chairman also confirms that all those non-executive directors seeking re-election at the 2009 AGM continue to contribute effectively and to demonstrate commitment to their roles, including having time to attend all Board and appropriate Committee meetings and to carry out other appropriate duties.

The Senior Independent Non-Executive Director met with the independent non-executive directors on 16 December 2008, in the absence of the Chairman, to assess the Chairman’s effectiveness. Notwithstanding Mr Bramson’s role as chairman and chief executive officer of Nautilus, Inc the independent non-executive directors were of the opinion that Mr Bramson gave sufficient time to his role as Chairman of the Company and was effective in that role during the year.

Board Committees

Audit Committee
Chairman, Ian Brindle

The Audit Committee comprises Ian Brindle, Tom Maxwell and Alex Walker, all of whom are independent non-executive directors and the composition of the Committee is compliant with the Code. The Code requires that the Audit Committee includes at least one member who has recent, significant and relevant financial experience and the Board believes that both Ian Brindle and Tom Maxwell provide such experience.

During 2008, the Audit Committee held three meetings at which there was full attendance by Committee members. At all meetings the Company’s external auditors, the Chief Financial Officer, the Group Vice President-Finance, the Head of Financial Reporting and the Company Secretary were in attendance. The Chairman and the other directors may also attend the meetings. The Committee also meets with the external auditors without management present. The minutes of all Committee meetings are available to all directors.

The Audit Committee assists the Board in fulfilling its responsibilities by reviewing financial statements and post audit findings before their presentation to the Board, focusing in particular on accounting policies, compliance, management judgement and estimates. It also monitors the Group’s internal control and risk management regime and financial reporting. Any significant findings or identified weaknesses are closely examined so that appropriate action can be taken, monitored and reported to the Board. The Audit Committee also advises the Board on the appointment of external auditors.

There is a detailed agenda for each Audit Committee meeting. Specific issues dealt with during the year are set out below.

In February 2008 the Committee considered the external auditors’ performance and independence and their re-appointment, reviewed the annual financial statements, key accounting policies, areas of judgement, quality of earnings, the external auditors’ report on the year end audit and management’s responses to the issues raised. The Committee also reviewed corporate governance within the Group, in particular compliance with Turnbull and the annual internal control audit plan.

In August 2008 the Committee reviewed the Half-year Report, key accounting policies, areas of judgement, quality of earnings, the external auditors’ report on the half-year audit and management’s responses to the issues raised. The Committee also reviewed internal controls throughout the Group, with particular emphasis on visits by the financial management team to the business units.

In November 2008 the Committee reviewed the external auditors’ report on their strategy and scope for the audit of the annual financial statements and proposed fees. The Committee also reviewed the corporate risk register and an amended, updated Ethics Policy which it recommended to the Board should be adopted throughout the Group.

At each meeting the Group Vice President-Finance also briefed the Committee on progress made against the annual internal control audit plan and any significant findings. Regular reports to the Committee also covered issues in the areas of tax, litigation, treasury and health and safety.

The Audit Committee has adopted a policy in relation to the provision of non-audit services performed by the external auditor to ensure that the provision of such services does not impair the external auditors’ independence or objectivity. This policy is reviewed on an annual basis. A report is presented to the Committee on a regular basis detailing all non-audit services performed by the external auditors, including cost, when the services were provided and who approved the instruction.

This policy identifies those services which the external auditors are permitted to provide and those which they are precluded from providing. Precluded services include, but are not limited to, bookkeeping or other services relating to the accounting records or financial statements, financial information systems design and implementation, management functions, human resources, actuarial services and information technology consulting. If the Company wishes to engage the external auditors to provide any other services which are not contained in the policy and which are not precluded, the Company must obtain pre-approval for such services from the Audit Committee through the Committee’s Chairman.

As part of this policy, the Committee also pre-approves annual financial limits for permitted audit services, tax services and any other services, which the Company may pay to Ernst & Young globally for services performed during the year. These financial limits may not be exceeded without approval by the Committee. Committee approval of permitted services is not required during the year provided the aggregate amounts paid by the Company do not exceed the pre-approved financial limits.

The total fees paid to Ernst & Young LLP during the year to 31 December 2008 were £0.5 million (2007 £0.6 million) of which none (2007 £0.1 million) related to non-audit work. Further disclosure of fees paid to the auditors during the year can be found in note 5 to the audited consolidated financial statements of the Group.

Remuneration Committee
Chairman, Alex Walker

The Remuneration Committee comprises Ian Brindle, Duncan Lewis and Alex Walker, all of whom are independent non-executive directors and the composition of the Committee is compliant with the Code.

Further details about the Remuneration Committee are included in the Report on directors’ remuneration on pages 32 to 41.

Nomination Committee
Chairman, Edward Bramson

The Nomination Committee comprises the Chairman and all non-executive directors and meets at least once each year. During 2008 the Nomination Committee held two meetings at which there was full attendance by Committee members except for Duncan Lewis, who was unable to attend one meeting. The Nomination Committee is responsible for reviewing the composition and structure of the Board and for identifying and recommending candidates for executive and non-executive positions, based on the required role and capabilities which have been specified for the appointment. Executive search consultants are used by the Nomination Committee to assist this process as appropriate. As the majority of members are independent non-executive directors, the composition of the Committee is compliant with the terms of the Code.

Relations with Shareholders

Communication with all shareholders is given a high priority and a number of methods are used to promote greater understanding and dialogue with investment audiences. Dialogue with institutional investors is conducted on a regular basis by the Chairman, the Chief Executive Officer and the Chief Financial Officer. The Company’s largest shareholder, Sherborne Investors GP, LLC has been represented on the Board by Edward Bramson and Gerard Eastman since December 2006.

The Company has an established cycle of communication based on its financial reporting calendar. This includes the Preliminary Results in February, Annual Report in March, Annual General Meeting and Interim Management Statement in May, Half-year Report in August and the Interim Management Statement in November.

The Chairman, Chief Executive Officer and Chief Financial Officer ensure that the views expressed at meetings with institutional shareholders are communicated effectively to the Board as a whole so that any issues or concerns are fully understood.

The Company promotes the use of electronic communication. All stock exchange announcements and presentations to shareholders are made available on our website, together with webcasts of our annual and half-year financial results. Our website also contains up to date corporate governance information including terms of reference for the three Board Committees, the terms and conditions of appointment of non-executive directors, the Company’s Ethics Policy and Articles of Association.

Electronic Communications

At its 2008 AGM the Company passed a resolution allowing it to communicate with shareholders by means of the Company’s website and an invitation to sign up for this method of communication will be sent to shareholders with the 2009 AGM documentation. Electronic communications provide significant benefits for shareholders and the Company in terms of timeliness of information, reduced environmental impact and cost and the Board encourages investors to participate in the programme.

Pensions Governance

The Group’s principal pension and retirement schemes exist in the UK and the US. Scheme funds are held separately from those of the Group and are administered by trustees (which include employees and independent bodies). The schemes do not lend money or lease any assets to the Group.

Internal Control

The Board has overall responsibility for the Group’s system of internal control. The Board, assisted by the Audit Committee, has reviewed the effectiveness of this system and this review did not reveal any significant issues or weaknesses. The Board confirms that this process was in place throughout the year under review and up to the date of approval of these financial statements. The primary aim is to operate a system which is appropriate to the business and which can, over time, increase shareholder value whilst safeguarding the Group’s assets. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

Process

Day to day responsibility for effective internal control and risk monitoring rests with senior management at business unit level.

The Board and the Audit Committee continue to agree that currently there is no need for a dedicated internal control department. Responsibility for internal control rests with the Group Vice President Finance and North America Vice President Finance. Both of these senior finance managers are independent of any business unit and play a key role in providing an objective view and continuing assessment of the effectiveness of the internal control systems throughout the Group. The Group consists of a limited number of entities which can comfortably be covered by the two senior finance managers. As stated above, the Group Vice President Finance attends all Audit Committee meetings to give an update on any internal control issues arising and any outstanding remedial actions.

The Group’s system of risk management comprises an integrated risk management strategy of regular self-assessment of all business units. Significant risks are regularly reviewed by the Audit Committee and by the Board.

In addition to this process, the following key elements are critical to the overall internal control environment:

• an organisational structure with clear operating procedures, defined lines of responsibility and delegated levels of authority;
• an ethics policy (which has been approved by the Board), which sets standards of professionalism and integrity for all employees and operations. The Ethics Policy also includes “whistleblowing” procedures whereby employees may report, in confidence, suspected wrongdoings;
• a comprehensive strategic planning, financial control and budgeting system which is properly documented and regularly reviewed; and
• a disciplined acquisitions and divestments due diligence process and post acquisition integration programme.