Throughout the year, the Company complied with the provisions of section 1 of the Combined Code on corporate governance published by the Financial Reporting Council in July 2003.

The Company's approach to corporate governance

The Company has a policy of seeking to comply with established best practice in the field of corporate governance. The Board has adopted core values and Group standards which set out the behaviour expected of staff in their dealings with shareholders, customers, colleagues, suppliers and other stakeholders of the Company. One of the core values communicated within the Group is a belief that the highest standard of integrity is essential in business.

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The Board's responsibilities and processes

The Board is responsible to shareholders for the overall management of the Group. It determines matters including financial strategy and planning and takes major business decisions. The Board has put in place an organisational structure. This is further described under the heading "internal control".

The Board has approved a formal schedule of matters reserved to it and its duly authorised Committees for decision. These include:

• approval of the Group's overall strategy, strategic plan and annual operating budget;
• approval of the Company's interim and annual financial statements and changes in the Group's accounting policies or practices;
• changes relating to the capital structure of the Company or its regulated status;
• major capital projects;
• major changes in the nature of business operations;
• investments and divestments in the ordinary course of business above certain limits set by the Board from time to time;
• adequacy of internal control systems;
• appointments to the Board and Management Committee;
• principal terms and conditions of employment of members of Management Committee; and
• changes in employee share schemes and other long-term incentive schemes.

Matters delegated to management include implementation of the Board approved strategy, day-to-day operation of the business, the appointment of all executives below Management Committee and the formulation and execution of risk management policies and practices.

A Group succession and contingency plan is prepared by management and reviewed periodically by the Board. The purpose of this plan is to identify suitable candidates for succession to key senior management positions, agree their training and development needs, and ensure the necessary human resources are in place for the Company to meet its objectives.

Meetings of the Board During the year, there were six meetings of the Board of Directors. The Directors who served throughout the year attended all six meetings, save for Mr F G Steingraber who attended five meetings. Mr R W A Swannell attended the four meetings held since his appointment on 1 September 2006 and Dr P Mihatsch attended the two meetings held before his retirement as a Director on 31 July 2006.

The principal matters considered by the Board during the year included:

• the Group strategic plan, budget and financial resources;
• the Group's capital structure, balance sheet efficiency and the return of capital to shareholders;
• regular reports from the Chief Executive;
• co-investment arrangements for investment staff;
• the recommendations of the Valuations Committee on valuations of investments;
• the Company's share price performance and shareholder perceptions following the release of year end results;
• the raising of the Group's latest European Buyout Fund;
• the raising of a fund for infrastructure investment;
• establishing a Quoted Private Equity team to apply private equity management skills to small and mid-cap listed companies;
• risk management arrangements and investment approval process;
• a review of the Group's advisory and corporate broking relationships;
• independence of non-executive Directors;
• the valuation methodology, investment strategy and the composition of the trustees of The 3i Group Pension Plan; and
• corporate responsibility initiatives and performance.

Information Reports and papers are circulated to the Directors in a timely manner in preparation for Board and committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time.

Performance evaluation During the year, the Board conducted its annual evaluation of its own performance and that of its committees and individual Directors. The Chairman led the process with the aid of an external consultant. All Board members completed a questionnaire and gave personal views to the Chairman, who also sought views from all members of the Management Committee. The Chairman gave feedback to the Board and to individual Directors. These processes also involved evaluation by members of Board committees of their performance. The Senior Independent Director led a review by the Directors of the performance of the Chairman.

Following the completion of the above process, the Board concluded that:

• it had benefited from having two strategy sessions during the year (in addition to its regular Board meetings), dealing with high level issues and specific issues respectively, and that this practice should be continued;
• as the number of business lines had increased, the amount of time spent on specific strategic issues relating to them would also increase;
• it should continue the practice of holding at least one meeting a year away from the Company's head office in order to enable members to spend time with the executives responsible for building the Company's global capability;
• the preparation for succession planning had been beneficial and the Board invited more opportunities to engage with those executives likely to be promoted to Management Committee;
• it should continue the process of adding external capability to the Board to match changes in the Group's international commercial business and in financial markets; and
• consideration should be given as to how further external input into the Board review process could supplement existing processes.

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The roles of the Chairman and the Chief Executive

The division of responsibilities between the Chairman of the Board and the Chief Executive is clearly defined and has been approved by the Board.

The Chairman The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives. The Chairman is responsible for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman has no involvement in the day-to-day business of the Group. The Chairman facilitates the effective contribution of non-executive Directors and constructive relations between executive and non-executive Directors. The Chairman ensures that regular reports from the Company's brokers are circulated to the non-executive Directors to enable non-executive Directors to remain aware of shareholders' views. The Chairman ensures effective communication with the Company's shareholders.

The Chief Executive The Chief Executive has direct charge of the Group on a day-to-day basis and is accountable to the Board for the financial and operational performance of the Group. The Chief Executive has formed a committee called Management Committee to enable him to carry out the responsibilities delegated to him by the Board. The Committee comprises the executive Directors, the Company Secretary, Mr B N Carnegie-Brown, Ms D R Collis, Mr C P Rowlands, Mr J B C Russell, Mr A J M Taylor, Mr P Waller and Mr G A R Zarzavatdjian. The Committee meets on a regular basis to consider operational matters and the implementation of the Group's strategy.

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Senior Independent Director

The Board has appointed Mr O H J Stocken as Senior Independent Director, to whom, in accordance with the Combined Code, concerns can be conveyed.

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Directors

The Board comprises the Chairman, six independent non-executive Directors and three executive Directors. Biographical details for each of the Directors are set out in the Board of Directors and Management Committee. Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Mr S P Ball, Mme C J M Morin-Postel, Mr M J Queen, Mr F D Rosenkranz, Sir Robert Smith and Mr F G Steingraber served throughout the period under review. Mr R W A Swannell served as a Director from 1 September 2006. Dr P Mihatsch served as a Director until 31 July 2006. As stated in the Notice of AGM for 2006, Mr F D Rosenkranz will be retiring from the Board at the conclusion of the 2007 AGM.

In addition to fulfilling their legal responsibilities as Directors, non-executive Directors are expected to bring an independent judgment to bear on issues of strategy, performance, resources and standards of conduct, and to help the Board provide the Company with effective leadership. They are also expected to ensure high standards of financial probity on the part of the Company and to monitor the effectiveness of the executive Directors.

The Board's discussions, and its approval of the Group's strategic plan and annual budget, provide the non-executive Directors with the opportunity to contribute to and validate management's plans and assist in the development of strategy. The non-executive Directors receive regular management accounts, reports and information which enable them to scrutinise the Company's and management's performance against agreed objectives.

Directors' independence All the non-executive Directors (other than the Chairman, who was independent on appointment) are considered by the Board to be independent for the purposes of the Combined Code. The Board assesses and reviews the independence of each of the non-executive Directors at least annually having regard to the potential relevance and materiality of a Director's interests and relationships rather than applying rigid criteria in a mechanistic manner.

No Director was materially interested in any contract or arrangement subsisting during or at the end of the financial period that was significant in relation to the business of the Company.

Directors' employment contracts Details of executive Directors' employment contracts are set out in the Directors' remuneration report

Training and development The Company has developed a training policy which provides a framework within which training for Directors is planned with the objective of ensuring Directors understand the duties and responsibilities of being a director of a listed company. All Directors are required to update their skills and maintain their familiarity with the Company and its business continually. Presentations on different aspects of the Company's business are made regularly to the Board. On appointment, all non-executive Directors have discussions with the Chairman and the Chief Executive following which appropriate briefings on the responsibilities of Directors, the Company's business and the Company's procedures are arranged. The Company provides opportunities for non-executive Directors to obtain a thorough understanding of the Company's business by meeting members of the senior management team who in turn arrange, as required, visits to investment or support teams.

During the year the Directors received training on anti money-laundering, the changes to the Combined Code on Corporate Governance, developments in relation to the implementation of the Transparency Directive and Companies Act 2006 and changes to the Listing Rules. Non-executive Directors also received presentations on specific aspects of the Company's business. During the year, the Company also held an Environmental Awareness day in which both staff and Directors participated.

The Company has procedures for Directors to take independent legal or other professional advice about the performance of their duties.

Re-election Subject to the Company's Articles of Association, the Companies Acts and satisfactory performance evaluation, non-executive Directors are appointed for an initial period of three years. Before the third and sixth anniversaries of a non-executive Director's first appointment, the Director discusses with the Board whether it is appropriate for a further three year term to be served. The reappointment of non-executive Directors who have served for more than nine years is subject to annual review.

The Company's Articles of Association provide for:

1. Directors to retire at the first AGM after their appointment by the Board and for the number nearest to, but not exceeding, one-third of the remaining Directors to retire by rotation at each AGM; and
2. all Directors to retire at least every three years.

Subject to the Articles of Association, retiring Directors are eligible for reappointment.

In accordance with the Articles of Association, at the AGM to be held on 11 July 2007:

1. Mr R W A Swannell, having been appointed as a Director since the AGM in 2006, will retire and, being eligible, offer himself for reappointment; and
2. Baroness Hogg, Mr P E Yea and Mr F G Steingraber will retire by rotation and, being eligible, offer themselves for reappointment.

The Board's recommendation for the reappointment of Directors is set out in the Notice of AGM.

Directors' indemnities The Company's Articles of Association provide that, subject to the provisions of the Companies Acts, the Directors shall be indemnified against liabilities incurred by them as Directors in defending any proceedings in which judgment is given in their favour, or where they have been acquitted or been granted relief by the court. As permitted by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Company's Articles of Association, the Company has maintained Qualifying Third-Party Indemnity Provisions (as defined under section 309B of the Companies Act 1985) for the benefit of the Company's Directors and the Company Secretary throughout the period.

Under the rules of the 3i Group Pension Plan ("the Plan"), the Company has granted an indemnity to the directors of Gardens Pension Trustees Limited (a corporate trustee of the Plan and a wholly owned subsidiary of the Company) against liabilities incurred as directors of that corporate trustee.

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The Board's committees

The Board is assisted by various standing committees of the Board which report regularly to the Board. The membership of these committees is regularly reviewed by the Board. When considering committee membership and chairmanship, the Board aims to ensure that undue reliance is not placed on particular Directors.

These committees all have clearly defined terms of reference which are available at www.3igroup.com. The terms of reference of the Audit and Compliance Committee, the Remuneration Committee and the Nominations Committee provide that no one other than the particular committee chairman and members may attend a meeting unless invited to attend by the relevant committee.

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Audit and Compliance Committee

The Audit and Compliance Committee comprises Mr O H J Stocken (Chairman), Mme C J M Morin-Postel, Mr F D Rosenkranz and Sir Robert Smith, all of whom served throughout the period. All the members of the Committee are independent non-executive Directors. The Board is satisfied that the Committee Chairman, Mr O H J Stocken, has recent and relevant financial experience.

During the year, there were four meetings of the Committee all of which were attended by all members of the Committee save that Mme C J M Morin-Postel attended three of the four meetings.

During the year, the Committee:

• reviewed the effectiveness of the internal control environment of the Group and the Group's compliance with its regulatory requirements and received reports on bank covenants, third-party liabilities and off-balance sheet liabilities;
• reviewed and recommended to the Board the accounting disclosures comprised in the interim and annual financial statements of the Company and reviewed the scope of the annual external audit plan and the external audit findings;
• reviewed matters relating to the Group's key performance measures, International Financial Reporting Standards and financial reporting requirements arising from the implementation of the Transparency Directive;
• received regular reports from Group Risk Assurance and Audit (the Group's internal audit function), monitored its activities and effectiveness, and agreed the annual internal audit plan;
• received regular reports from Group Compliance (the Group's regulatory compliance function) and Group Risk Management Committee, and monitored their activities and effectiveness;
• oversaw the Company's relations with its external auditors including assessing auditor performance, independence and objectivity, recommending the auditors' reappointment and approving the auditors' fees;
• met with the external auditors and the heads of Group Compliance and Group Risk Assurance and Audit individually, all in the absence of management;
• considered whether matters existed which could give rise to conflicts of interests between Directors and the Company.

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Remuneration Committee

The Remuneration Committee comprises Sir Robert Smith (Chairman), Mme C J M Morin-Postel, Mr F D Rosenkranz, Mr F G Steingraber and Mr O H J Stocken all of whom served throughout the period. Sir Robert Smith succeeded Mr F D Rosenkranz as Chairman of the Committee with effect from 1 August 2006. All the members of the Committee are independent non-executive Directors. During the year, there were six meetings of the Remuneration Committee all of which were attended by all members of the Committee, save that Mr F G Steingraber attended five of the six meetings. Details of the work of the Remuneration Committee are set out in the Directors' remuneration report.

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Nominations Committee

The Nominations Committee comprises Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Mr R W A Swannell, Mme C J M Morin-Postel, Mr F D Rosenkranz, Sir Robert Smith and Mr F G Steingraber, all of whom served throughout the period, save for Mr R W A Swannell who served from 27 September 2006. Dr P Mihatsch served as a member of the Committee until 31 July 2006. During the year, there were two meetings of the Nominations Committee. The members who served throughout the year attended both of these meetings save that Mr F G Steingraber attended one meeting. Mr R W A Swannell attended the one meeting held following his appointment. Dr P Mihatsch was unable to attend the one meeting held before he ceased to be a Committee member on 31 July 2006. The terms of reference of the Nominations Committee provide that the Chairman of the Board shall not chair the Committee when dealing with the appointment of the Chairman's successor.

During the year, the Nominations Committee considered and recommended a candidate for appointment as a non-executive Director of the Company. The Committee also considered the composition of the Board to ensure that the balance of its membership, as between executive and non-executive Directors, and non-executive Directors' length of service remained appropriate.

A formal, rigorous and transparent process for the appointment of Directors has been established with the objective of identifying the skills and experience profile required of new Directors and identifying suitable candidates. The procedure includes the appraisal and selection of potential candidates, including (in the case of non-executive Directors) whether they have sufficient time to fulfil their roles. Specialist recruitment consultants assist the Committee to identify suitable candidates for appointment. The Committee's recommendations for appointment are put to the full Board for approval.

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Valuations Committee

The Valuations Committee comprises Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Mr S P Ball and Mr R W A Swannell, all of whom served throughout the period, save that Mr R W A Swannell served from 27 September 2006. Dr P Mihatsch served as a member of the Committee until 31 July 2006. There were three meetings of the Valuations Committee during the year. The members who served throughout the year attended all meetings. Mr R W A Swannell attended the one meeting held following his appointment and Dr P Mihatsch attended the one meeting held before he ceased to be a Committee member.

During the year, the Valuations Committee considered and made recommendations to the Board on valuations of the Group's investments to be included in the interim and annual financial statements of the Group and reviewed valuations policy and methodology.

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The Company Secretary

All Directors have access to the advice and services of the Company Secretary. The Company Secretary is responsible for advising the Board, through the Chairman, on governance matters. The Company's Articles of Association and the schedule of matters reserved to the Board or its duly authorised committees for decision provide that the appointment and removal of the Company Secretary is a matter for the full Board.

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Relations with shareholders

The Board recognises the importance of maintaining a purposeful relationship with the Company's shareholders. The Chief Executive and the Finance Director, together with the Group Communications Director, meet with the Company's principal institutional shareholders to discuss relevant issues as they arise. The Chairman maintains a dialogue with shareholders on strategy, corporate governance and Directors' remuneration as required.

The Board receives reports from the Company's brokers on shareholder issues and non-executive Directors are invited to attend the Company's presentations to analysts and are offered the opportunity to meet shareholders.

The Company's major shareholders are offered the opportunity to meet newly appointed non-executive Directors. During the year such shareholders were given the opportunity to meet Mr R W A Swannell following his appointment on 1 September 2006.

The Company also uses its AGM as an opportunity to communicate with its shareholders. At the Meeting, business presentations are made by the Chief Executive and the Finance Director. The Chairmen of the Remuneration, Audit and Compliance, and Nominations Committees are available to answer shareholders' questions.

During the year, at the invitation of the Chairman, the Company's major shareholders met with the Chairman, the Chairmen of the Audit and Compliance Committee and the Remuneration Committee and the Company Secretary to discuss matters of corporate governance and corporate responsibility relevant to the Company and its shareholders.

The Notice of AGM for 2006 was dispatched to shareholders not less than 20 working days before the Meeting. At that Meeting, voting on each resolution was taken on a poll and the poll results were made available on the Company's website. In accordance with the Company's Articles of Association, on each poll every member who was present in person or by proxy had one vote for each share held.

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Portfolio management and voting policy

In relation to unquoted investments, the Group's approach is to seek to add value to the businesses in which the Group invests through the Group's extensive experience, resources and contacts. In relation to quoted investments, the Group's policy is to exercise voting rights on matters affecting the interests of the Group.