20-F

Number of Shares

BlackRock, Inc.

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 918,167,367 Ordinary Shares of 20¢ each

Indicate by check mark if the registrant is a well seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨

If this Report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

If “Other” has been checked to the previous question indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

You can read more about our financial performance in the financial review on page 36

Chairman’s statement

Dear Shareholder,

In 2013, Smith & Nephew generated good underlying revenue and trading profit growth.

We continued to focus investment on growth opportunities and returned significant value to Shareholders through increased dividends and a share buy-back programme. Momentum increased throughout the year as we delivered on our strategy to reshape Smith & Nephew for the future.

Our revenue was $4,351 million, up 4% on an underlying basis. Advanced Wound Management delivered strong growth, led by Healthpoint Biotherapeutics, our major 2012 acquisition. Sports Medicine Joint Repair had another successful year, and we improved our performance in Orthopaedic Reconstruction.

Almost 13% of our revenues now come from emerging market countries, up from just over 8% in 2010. We were one of the first companies in our sector to focus on these markets. We are building sustainable businesses through the strategy of establishing direct relationships with customers, as well as developing tailored products. In 2013, we invested further in our existing teams and made acquisitions in Brazil, India and Turkey to strengthen our platform.

Our trading profit was up 5% on an underlying basis at $987 million. The trading profit margin of 22.7% met our expectations as we invested more in the emerging markets and in research & development, and cost of the US medical device excise tax ($24 million in 2013).

Ethics, compliance & governance

We give high priority to compliance and ethics, as well as health, safety and the environment. The Board continues to encourage management in their drive to ensure all of Smith & Nephew’s programmes are world-class.

The Board also places great emphasis on governance and is mindful of its responsibility to promote the long-term interests of the Company for all our stakeholders. This is described in detail in the Corporate Governance section of this Annual Report (pages 44 – 85).

Creating sustainable value

Smith & Nephew has a long track record of creating value for Shareholders. For instance, we have paid a dividend every year since 1937. Since 2006, during my tenure as Chairman, it is pleasing to report that we have delivered a compound annual growth rate in adjusted earnings per share of 8% against a FTSE 100 average of 6%, along with a dividend compound growth rate of 14%. And the share price is up more than 90% in that time. The Group generated trading cash flow of $5.9 billion between 1 January 2006 and 31 December 2013, demonstrating our vitality over the long-term.

In 2013, we set out a Capital Allocation Framework that will govern how we prioritise the use of the strong cash flow we generate. This framework will guide our continued

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investment in organic growth, and maintenance of a progressive dividend. It also gives us headroom to make further acquisitions and includes a commitment to return any excess capital to Shareholders. It is underpinned by a desire to maintain a strong balance sheet to ensure solid investment grade credit metrics.

Following these principles, we spent $226 million on a share buy-back programme during the year. This, together with the 2012 dividend increase, resulted in a total distribution to Shareholders in 2013 of $465 million, two and a half times the level of the prior year.

The Board is pleased to propose a final dividend for the year of 17.0¢ per share, giving a total dividend for 2013 of 27.4¢, up 5% year-on-year.

Board changes

I will step down as Chairman of Smith & Nephew at the Annual General Meeting in April 2014. Roberto Quarta joined the Board as Non-executive Director in December 2013 and will take over as Chairman. Roberto has impressive business and board experience and is chairman of IMI plc, a FTSE 100 listed engineering business and of Clayton, Dubilier & Rice, Europe, a private equity firm.

Our Senior Independent Non-executive Director, Richard De Shutter, and Non-executive Director Ajay Piramal, will also both retire at the Annual General Meeting. I would like to thank them for their service. In particular, Richard’s contribution in this most important role has been invaluable. We are fortunate to have as replacement the highly experienced Brian Larcombe, who will become Senior Independent Non-executive Director.

In 2013, we welcomed to the Board Julie Brown as Chief Financial Officer and Michael Friedman as Non-executive Director. Julie has quickly established herself as an effective Executive Director and her influence is already seen in many areas, including the Capital Allocation Framework. Michael’s expertise in the US healthcare system and experience leading a major research and treatment institution has enhanced the Board.

Setting Smith & Nephew apart

During 2013, I was reminded of the quality of our people as we reviewed our responses to natural disasters, providing resources to aid recovery in the Philippines and in our own offices and communities, under Olivier Bohuon’s leadership, responding to a major flood at the Advanced Wound Management site in Hull, UK and to a tornado near our facility in Oklahoma City, US. The tenacity and compassion sets Smith & Nephew apart, as it has throughout our history of supporting healthcare professionals for more than 150 years.

It has indeed been a privilege working with the people at Smith & Nephew and to serve the interests of customers, employees and Shareholders. The Company has shown great resilience in the recent economic environment, building services for customers and value for Shareholders. There is an excellent team in place, both Executive and Non-executive.

I wish the Company well for a promising future.

Yours sincerely,

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Sir John Buchanan

Chairman

You can read more about our financial performance in the marketplace review on page 16


Advanced Surgical Devices
ORTHOPAEDIC RECONSTRUCTION
Specialist hip and knee implant systems.
REVENUE¹
$1,518m			-1%
2012 $1,540m

TRAUMA & EXTREMITIES
Internal and external devices used in the stabilisation of severe fractures and deformity correction procedures.
REVENUE^1,2
$486m			+4%
2012 $474m

SPORTS MEDICINE JOINT REPAIR
Instruments, technologies and implants necessary to perform minimally invasive surgery of joints.
REVENUE^1,2
$496m			+7%
2012 $474m

ARTHROSCOPIC ENABLING TECHNOLOGIES
Cutting, visualisation and fluid management technologies necessary for Sports Medicine Joint Repair.
REVENUE^1,2
$441m			-2%
2012 $458m

OTHER ASD
Including gynaecological instrumentation.
REVENUE^1,2
$74m			+14%
2012 $162m

You can read more about our franchise areas in the segment analysis on pages 24 to 33

Dear Shareholder,

For more than 150 years Smith & Nephew has supported healthcare professionals as they improve the quality of life for patients. Today we do this by providing advanced medical technologies that move clinical boundaries and reduce economic costs.

We focus where we see developing needs and invest in new products and techniques to improve outcomes and expand access. Through these actions we are at the forefront of fast growing segments such as Sports Medicine and Advanced Wound Bioactives, are leaders in the emerging markets, and continue to develop in our more mature segments. We are building a sustainable business to best support surgeons, nurses and healthcare managers in the future.

In 2013, I am pleased to report that we made significant progress, expanding our product portfolio, building our platform, growing in the emerging markets and embedding a culture of perpetual efficiency.

Accelerating innovation

In 2013, we maintained a high rate of innovation, launching major new products such as the natural-motion JOURNEY^à II BCS Total Knee System and, in Sports Medicine, HEALICOIL^à REGENESORB^à, an innovative next generation bio-composite suture anchor. We also delivered 23 new Advanced Wound Management products, such as the DURAFIBER^à Ag antimicrobial dressing.

Looking ahead, we have a strong product pipeline, particularly in Trauma & Extremities and Sports Medicine. Overall we increased research & development (‘R&D’) investment to $231 million in 2013, representing 5.3% of revenue, and are committed to maintaining these high levels of investment and innovation going forward. We were proud to be named one of Forbes Magazine’s ‘Most Innovative Companies’ of 2013.

We are also investing in medical education to ensure that our customers continue to have access to the best training on our products and techniques. This includes significant online resources such as Education and Evidence. Launched in 2013, this is a powerful new e-learning platform for surgeons to access and share peer-to-peer education.

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so that ever more of

our business comes from

areas of higher growth

Healthpoint acquisition delivers

Our major acquisition at the end of 2012, Healthpoint Biotherapeutics, has given us a leading position in bioactives, the fastest growing segment of Advanced Wound Management. This business has out-performed our expectations, increasing its revenue by 47% in 2013. With its unique portfolio, excellent sales execution and expertise in product research and development, it is an outstanding addition to Smith & Nephew.

Leaders in emerging markets

Throughout 2013, we have built upon our leading position in the emerging markets, generating strong revenue growth. We enhanced our platform, investing in the sales force and infrastructure in markets such as Mexico and the Middle East, as well as acquiring distributors in Turkey and Brazil. By having a direct relationship with our customers we are able to offer them a fuller range of products and services.

We see a major opportunity to create portfolios for patients in the economic mid-tier across the emerging markets, and launched our first products and acquired the Sushrut-Adler Indian trauma business in 2013.

Perpetual efficiency

These strategic investments and many other initiatives have been made possible through our continued drive to be more efficient, to reduce cost, and to simplify and improve our operating model. In 2011, we announced an initial programme to generate annual savings of $150 million and this will be largely complete by the end of 2014. We are now a leaner business, and, as importantly, we are embedding a culture of perpetual efficiency into our processes and future thinking.

Sustainability

Our mission at Smith & Nephew is to help our customers improve people’s lives. I can think of nothing more intrinsic to this mission than operating sustainably and responsibly to

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deliver long-term benefits. In 2013, we maintained our commitment to our customers, patients, employees, communities and Shareholders. This was again recognised in our inclusion in the FTSE4Good and Dow Jones Sustainability indices.

Sir John Buchanan

Sir John Buchanan will step down as Chairman of the Board in April 2014. I wish to thank Sir John for his leadership, counsel and dedication over the past nine years. As Chairman he has overseen a number of significant changes and has given me tremendous support in my role as Chief Executive Officer. We are confident that in Roberto Quarta we have found another excellent Chairman.

Acquisition of ArthroCare Corp

In February 2014, we announced our intention to acquire ArthroCare, an innovative medical devices company with a highly complementary sports medicine franchise. Based in Austin, Texas, ArthroCare’s technology and products will significantly strengthen our portfolio – and we will use our global footprint to drive substantial new revenue growth. We expect to complete this acquisition in the middle of 2014 for a net cost of approximately $1.5 billion.

Rebalancing Smith & Nephew

Smith & Nephew made excellent progress in 2013, delivering both revenue and earnings growth and generating strong cash flow. I would like to thank our employees for their contribution during the year. It was their dedication and focus that achieved these results, and importantly, are enabling us to accomplish our programmes to make the Group fit and effective for the future.

We are successfully reshaping and rebalancing Smith & Nephew so that even more of our business comes from areas of higher growth. In this way we will continue to deliver the best support for our customers and the greatest value for our Shareholders.

Yours sincerely,

LOGO

Olivier Bohuon

Chief Executive Officer


3 INNOVATE FOR VALUE
PERFORMANCE R&D investment now represents 5.3% of revenue, an increase in spending of 35% in reported terms. We have maintained our strong momentum of introducing new products: – In ASD, we successfully launched the JOURNEY II BCS Knee System and our Sports Medicine franchise expanded through a next generation HEALICOIL suture anchor range and we also expanded our Extremities offering – Over 20 new AWM products launched		– In our Emerging & International Markets we launched a low-cost camera to drive market expansion and access to minimally invasive joint repair – Launched new medical education websites to support healthcare professionals. GLOBAL OUTLOOK Innovation offers the key to meeting the realities of healthcare and economic paradigm in both Established and Emerging & International Markets. New products, technologies and surgical techniques hold the potential of reducing the overall cost of healthcare.
4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
PERFORMANCE Trading profit grew by 5% and trading profit margin decreased slightly to 22.7% as expected. Targeted investments, increased R&D and the new US Medical Device tax were partially off-set by efficiency and cost initiatives Key initiatives included: – Continuing to deliver our $150 million per annum efficiency savings programme – Expansion of the Suzhou facility continues on track – Started roll-out of major Europe- wide single IT and business intelligence platform.		GLOBAL OUTLOOK By simplifying and improving our operating model we can liberate resources to invest in growth opportunities and meet the persistent price pressure. A simpler and more efficient organisation allows us to make faster and better decisions.
5 SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS
PERFORMANCE 2013 has been another active year from a business development perspective, mainly focused on supporting our Emerging & International Markets strategy: – Acquisition of distributors in Brazil and Turkey – Acquisition of a mid-tier trauma business in India – Successful integration of Healthpoint Biotherapeutics which we acquired in 2012.		GLOBAL OUTLOOK Acquisitions and partnerships are important elements which supplement organic investment and provide increased opportunity for high growth and value creation.

1	The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.

2	Explanations of these non-GAAP financial measures are provided on pages 161 to 163.

Capital Allocation Framework

We consider that the efficient use of capital on behalf of Shareholders is an important objective. We have delivered good revenue and earnings growth and strong cash generation in the challenging markets of the last few years.

During 2011, we announced our Strategic Priorities, focusing our business on liberating resources to invest in driving greater growth. In order to support this strategy, the Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach was set out in the new Capital Allocation Framework announced in May 2013.

The Capital Allocation Framework will be used to prioritise the use of cash and ensure an appropriate capital structure. Our commitment, in order of priority, is to:

continue to invest in the business to drive organic growth;

maintain our progressive dividend policy;

realise acquisitions in-line with strategy; and

return any excess capital to Shareholders.

This is underpinned by maintaining leverage ratios commensurate with solid investment grade credit metrics.

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and strong

cash generation

In-line with the above framework, and reflecting our confidence in the successful execution of our Strategic Priorities, we commenced a $300 million share buy-back programme in May 2013. As of 31 December 2013 we had spent $226 million. This programme was suspended following our agreement to acquire ArthroCare, announced on 3 February 2014.

Liberating resources

In August 2011, Smith & Nephew announced a programme to drive structural efficiencies in order to liberate the resources needed to fund investment in the emerging markets and R&D, targeting savings of at least $150 million per annum. The cost of the currently identified programmes is expected to be $160 million in cash and $40 million in non-cash costs.

To date the Group has realised annualised benefits of $131 million and we expect to complete the programme in early 2015 and realise slightly more than the anticipated benefits. The costs are on track. As a result of this programme and other actions, a culture of continuously looking to be more efficient is being embedded across the Group.

Acquisitions

During the year the Group has completed acquisitions of manufacturing and distribution businesses in Turkey, Brazil and India. The aggregate cost was $126 million. Through these acquisitions, we are implementing a number of our Strategic Priorities: to build leadership positions in the Emerging & International Markets; to supplement our organic growth through acquisitions; and to bring forward mid-tier portfolios to these countries.

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Outlook

We anticipate the market conditions seen in the second half of 2013 to continue in 2014. We expect the US to be stable with some signs of improvement, Europe to remain challenging and the emerging markets to continue to offer opportunities for higher growth.

In terms of revenue growth by franchise, we expect:

– Orthopaedic Reconstruction, continuing its recent improved performance, to grow at approaching the market rate;

– Trauma & Extremities, building upon our recent investments, to grow overall at the market rate, but with a stronger second half to the year;

– Sports Medicine, with its strong product pipeline, to deliver growth above the market rate; and

– Advanced Wound Management, with its unique mix of leading products, to deliver another year of growth above the market. Within this, we expect Advanced Wound Bioactives to grow at a rate in the mid-teens.

In terms of trading profit margin, we expect to exceed our 2013 performance.

I am confident that our continuing focus on efficiency, coupled with further investments to drive growth and the disciplined use of our strong cash flow will generate greater value for our Shareholders.

Yours sincerely,

LOGO

Julie Brown

Chief Financial Officer

Our marketplace

We operate in

dynamic markets

Market trends

Demand for healthcare continues to increase worldwide influenced by the following trends:

Increased longevity and average age

As a result of improvements in healthcare and living conditions, life expectancy across the world has increased in modern times and this increase is expected to continue.

The Organisation for Economic Co-operation and Development (‘OECD’) calculates the average life expectancy at birth in 2010 as 79.7, a significant rise from the 70.3 calculated in 1970.

As a consequence of longer life expectancy and the falling birth rates in many developed countries, there is an expanding gap between the demand for healthcare and the ability of governments to supply healthcare. Demand for healthcare will increase because of the ageing world population but at the same time the changing balance of age in the population means that, relatively speaking, there is potentially an accompanying decrease in funds available for healthcare raised through taxation of the working population.

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More active lifestyles

Demand for healthcare is also increasing because people now expect to maintain active lifestyles longer into retirement and to return to activity sooner after treatment. This has resulted in a desire for less invasive surgery and quicker recovery times. Patients also desire products with a better replication of natural movement and an ability to cope with more rigorous activity over a longer period.

Obesity and associated chronic diseases

Obesity is an increasing global problem which causes more wear on the joints of the human body and increases demand for orthopaedic reconstruction.

Across the OECD countries, an average of 18% of the population is obese; this has increased from 13% in 2000.

Obesity also increases the risk of diabetes which can lead to other medical conditions and complications. In 2012, the International Diabetes Federation estimated that 8.3% of the world’s population (371 million people] suffer from diabetes and this is projected to rise to 9.9% (552 million people] by 2030.

There is a proven link between diabetes and a higher risk of surgical site infections which increases the risk of surgical procedures on diabetic patients. This risk can be minimised with the use of specialist wound care products designed to lower the risk of infection.

It is estimated that up to 10% of people with diabetes also suffer from diabetic foot ulcers. These ulcers are prone to infection, causing an increased risk of amputation, increased morbidity and are a significant burden on the health system.

Increased affluence in emerging markets

The emerging markets are becoming more affluent and therefore more able to afford medical treatments. However, the cost of many medical devices restricts access by the wider population.

Patient awareness

In certain countries, patients are becoming increasingly aware, from the internet and direct-to-customer advertising, of the various healthcare options and treatments available. This has led to some increased patient influence over the product purchasing decisions of medical service providers.


Global economic crisis The supply of healthcare in many of our markets is funded by governments. The global economic crisis in recent years has placed increased pressure on governments around the world to reduce or constrain healthcare expenditure. In summary The increased demand for healthcare products and the limitation of available resources is widening the funding gap. Providing technologies that deliver value by improving clinical outcomes while reducing the consumption of overall healthcare resources is vital for the success and sustainability of medical device businesses.				Regulatory standards and compliance in the healthcare industry The international medical device industry is highly regulated. Regulatory requirements are important in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development. National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew’s products include the Food and Drug Administration (‘FDA’) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the China Food and Drug Administration. In general, the trend in many countries in which we do business is towards higher expectations and increased enforcement activity by governmental authorities. We are committed to doing business with integrity and welcome the trend to higher standards in the healthcare industry. We and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. See ‘Legal proceedings’ on page 130.

RESPONDING TO THE MARKET

Smith & Nephew is committed to developing products that respond to the demand and supply pressures faced by the healthcare industry. Some examples are set out below.

Our VERILAST^à Technology has been laboratory tested to demonstrate wear performance sufficient for 30 years of use enabling a total replacement option for younger, more active patients.

PICO^à is our single use NPWT product which brings the wound healing benefits of NPWT to a wider audience due to its discrete size and portability. Research is also proving the benefits of NPWT products to reduce recovery times after major surgery, such as caesarean sections.

VISIONAIRE^à, our patient matched instrumentation, uses the patient’s MRI and X-rays to design cutting blocks specific to each patient. This may reduce surgery time by eliminating several sizing and alignment steps and improves precision in fitting the implant.

We are developing products targeting the middle economic tier of the emerging markets to capitalise on their forecast growth. This will enable doctors and nurses to deliver quality products to new patient communities around the world.

Our business

Our mission is to deliver

advanced medical technologies

Improving quality of life

Smith & Nephew’s business model, set out on page 7, supports our mission to deliver advanced medical technologies to help healthcare professionals, our customers, improve the quality of life for their patients.

Through it we:

– invest in research & development to create innovative new solutions that improve clinical outcomes and reduce the economic burden on healthcare systems;

– rigorously enforce regulatory and compliance standards, conducting business ethically everywhere we operate;

– ensure our manufacturing, supply and distribution footprint is lean and efficient;

– provide medical education and product training to healthcare professionals to help ensure safe and effective treatment for patients; and

– support our sales and marketing teams to guarantee our customers have the advanced technologies and supporting services they need to treat their patients.

Our business model is underpinned by our values and Capital Allocation Framework:

– our values of Innovation, Trust and Performance focus our people on being responsive to the needs of our customers; energetic, creative and passionate in our work; and building lasting and close relationships with our stakeholders; and

– Our Capital Allocation Framework enables us to invest for the future, both in organic growth and through acquisitions, whilst also generating value for Shareholders today through a progressive dividend policy and commitment to return any excess capital.

By implementing our Strategic Priorities we increase momentum throughout the business model to:

– build on our strong position in the Established Markets;

– realise the significant opportunities in the Emerging & International Markets;

– maintain an unremitting focus to innovate for value;

– simplify and improve our operating model to maximise efficiency; and

– supplement our organic growth through acquisitions.

Research and development

We have a deep knowledge of the needs of surgeons and nurses, we understand the economic pressures healthcare payers work under, and we recognise that patients are demanding better treatment options to restore quality of life. These factors inform our research and development (‘R&D’) strategy, which is at the heart of our business model.

In 2013, we again delivered many new and innovative products. These included a major new knee platform, the JOURNEY II BCS; the first sports medicine product to use Smith & Nephew’s proprietary advanced biocomposite material in the HEALICOIL REGENESORB Suture Anchor; and DURAFIBER Ag, combining a highly absorbent, gelling fibre dressing with the antimicrobial benefits of silver.

We have a strong new product pipeline for 2014, with many innovations scheduled, in particular in Sports Medicine Joint Repair, Trauma and Advanced Wound Management.

These new products, and many more currently in development, are a result of our focus on R&D. We invested $231 million in this area in 2013. At 5.3% of revenue this is an increase from the 4.1% spent in the previous year. We expect to maintain our investment level at around 5% of revenue going forward.

We are highly disciplined in project selection. Our R&D experts in the UK, US, Europe, China and India have extensive customer and sector knowledge, which is augmented by ongoing interaction with our marketing teams. Strict criteria are applied to ensure new products fulfil an unmet clinical need, have a strong commercial case, and are technologically feasible. Our R&D teams also work closely with manufacturing and supply chain management to ensure we can produce new products to clinical, cost and time specification.

Open Innovation

As part of our R&D strategy, Smith & Nephew supports and works with numerous small companies looking for help with developing and commercialising new technologies.

As supporters of NASA’s TecFusion Open Innovation programme we access and support companies developing highly creative, often disruptive, technologies that are funded by the US federal government.

We are a primary sponsor of the Massachusetts Medical Device Development Center (‘M2D2’) New Venture Competition, supporting entrepreneurial product development by early-stage medical device companies.

Our business continued

We are the commercial partner in SWAN-iCare, an EU-funded initiative to bring multidisciplinary European research teams together to deliver a next generation integrated autonomous solution for monitoring and adapting personalised therapy of foot and leg ulcers.

InVentures

Smith & Nephew also welcomes new product concepts from surgeons. Through our InVentures programme we collaborate to bring ideas to reality. InVentures evaluates surgeon concepts for technical and market viability and our development team works hand-in-hand with surgeons to deliver new products that advance healing. Commercialised products benefit from the global selling power of Smith & Nephew.

In 2013, we introduced a new MODULAR RAIL SYSTEM for deformity correction and limb restoration that was designed in collaboration with Dror Paley MD through the InVentures programme. This new treatment option highlights our increased investment in extremities and limb restoration, and our commitment to working directly with surgeon inventors.

Intellectual property

We protect the results of our research and development through patents and other forms of intellectual property. The Group’s patent portfolio currently includes in excess of 5,000 patents and patent applications. Patent protection for our products is sought routinely in our principal markets.

We also have a policy of protecting our products by registering trademarks under the local laws of markets in which such products are sold. We vigorously protect our trademarks against infringement.


		3 INNOVATE FOR VALUE
		New treatment for venous leg ulcers HP802-247 is an investigational human cell therapy for the treatment of venous leg ulcers currently in Phase III trials. Results from Phase llb trials investigating the efficacy of HP802-247 were previously published in The Lancet. Based on in vitro studies, HP802-247 is believed to release various growth factors and cytokines into the micro-environment of the wound. These living cells are anticipated to interact with the patient’s own cells to stimulate wound healing. HP802-247 has been designed to deliver a defined cell ratio (keratinocyte:fibroblasts) to support optimal tissue regeneration. Venous leg ulcers are increasingly common and costly to healthcare systems and a cause of prolonged suffering for patients. These wounds are caused by swelling and inflammation secondary to blockage or backflow in the veins of the legs. many venous ulcers fail to heal even after three months of standard treatment and develop into chronic, non-healing wounds. Based on an estimated figure of 2.5 million venous leg ulcers in the United States alone and a study of actual direct treatment costs of $9,685 per person, the annual cost of treating these wounds is likely to be in the many billions of dollars. Accordingly, the availability of innovative and more effective treatment strategies for such high-risk wounds could provide tremendous benefits to both patients and society.

In addition to protecting our market position by filing and enforcing patents and trademarks, we may oppose third party patents and trademark filings where appropriate in those areas that might conflict with our business interests.

In the ordinary course of business, we enter into a number of licensing arrangements with respect to our products. None of these arrangements individually is considered material to our current operations and financial results.

Regulatory and compliance

Code of conduct and business principles

Smith & Nephew earns trust with patients, customers, healthcare professionals, authorities and the public by acting in an honest and fair manner in all aspects of its operations. We expect the same from those with whom we do business, including distributors and independent agents that sell our products, as well as vendors that interact with others on our behalf. Our Code of Conduct and Business Principles (‘Code’) governs the way we operate to achieve these objectives.

Smith & Nephew takes into account ethical, social, environmental, legal and financial considerations as part of its operating methods. We have a robust whistle-blowing system in all jurisdictions in which Smith & Nephew operates. We are committed to upholding our promise in our Code that we will not retaliate against anyone who makes a report in good faith.

New employees receive training on our Code, and we assign annual compliance training to employees. In 2013, we created two additional courses: a refresher course on Preventing Bribery and Corruption and ‘Effective Communication’.

Global compliance programme

Smith & Nephew has implemented what we believe is a world-class Global Compliance Programme that helps our businesses manage risk and comply with laws and regulations. In 2013, Smith & Nephew continued to strengthen its comprehensive compliance programme, which includes global policies and procedures, on-boarding and annual training for its employees, managers, independent agents and key employees of distributors and high risk vendors around the world, monitoring and auditing processes, and reporting channels. Through a global intranet website, we provide resources and tools to guide employees to make decisions that comply with the law and our Code and earn trust. We conduct advance review and approval for any significant interactions with healthcare professionals or government officials. New distributors are subject to due diligence and are contractually obligated to comply with applicable laws and our Code. Their management are required to take compliance training and certify that they will ensure their employees and agents comply with the law and our Code. In 2013, we launched a compliance programme toolkit, in multiple languages, for our distributors to provide them with the resources to establish their own compliance programme. The toolkit includes draft policies, training materials and approval forms.

In 2012, under the terms of the Company’s Foreign Corrupt Practices Act (‘FCPA’) settlement (see Note 17.3 of the Notes to the Group accounts), we retained an independent monitor to review the effectiveness of our compliance programme and make recommendations, as appropriate, for further enhancements to the programme. In collaboration with the independent monitor, our programme has been enhanced even further. In late 2013, the monitor completed his 18-month review and concluded that Smith & Nephew’s compliance programme is reasonably designed and implemented to detect and prevent violations of the anti-corruption laws and is functioning effectively. Smith & Nephew will report directly to the US Department of Justice (‘DOJ’) and the US Securities and Exchange Commission (‘SEC’) for the remainder of the three-year settlement agreement.

Manufacturing

We continue to implement Lean Manufacturing throughout our factories and the supply chain to improve and sustain higher levels of service, quality, productivity and efficiency.

Core competencies include: materials technology; high-precision machining in Advanced Surgical Devices; and high-volume, automated manufacturing in Advanced Wound Management.

4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Perpetual efficiency

The significant investments undertaken in 2013 have been possible through our successful drive to be more efficient, reduce cost, and simplify and improve our operating model.

In 2011, we announced a programme to generate annual savings of $150 million. As a result of our work to date, we have annualised benefits of $131 million. The programme will be largely complete by the end of 2014.

Significant actions included a major reorganisation when we created the Advanced Surgical Devices division, the opening of an extension to our Advanced Wound Management factory in Suzhou, China, and the introduction of a major new IT platform.

We are now a leaner business, and, as importantly, we are embedding a culture of perpetual efficiency into our processes and future thinking.

We purchase raw materials, components, finished products and packaging materials from certain key suppliers. These principally include metal forgings and stampings for orthopaedic products, optical and electronic sub-components and finished goods for sports medicine products, active ingredients and finished goods for Advanced Wound Management and packaging materials across all businesses. Suppliers are selected, and contracts negotiated, by a centralised procurement team wherever possible, with a view to ensure value for money based on the total spend across the Group.

We outsource manufacturing where necessary to obtain specialised expertise or where it is possible to gain lower cost without undue risk to intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to specification, and establish and maintain a quality system. Suppliers are trained and are monitored through on-site assessments and performance audits that include quality, service and delivery.

Finished goods purchased for resale include screen displays, optical and electrical devices in the Advanced Surgical Devices division and skincare products in the Advanced Wound Management division.

We operate a number of manufacturing facilities around the globe, which are predominantly division specific, and a number of central distribution facilities in the key geographical areas in which we operate. Products are shipped to Group companies which hold small amounts of inventory locally for immediate or urgent customer requirements.

Advanced Surgical Devices

The Advanced Surgical Devices division’s largest manufacturing operation is based in Memphis (Tennessee, US), with additional production and assembly plants based in Mansfield (Massachusetts, US), Oklahoma City (Oklahoma, US), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China), Calgary (Canada), Warwick (UK) and Sangameshwar (India).

The Memphis facilities produce key products and instrumentation in our Knee Implants, Hip Implant and Trauma franchises. These include the JOURNEY II BCS and LEGION^à knees, the ANTHOLOGY^à Primary Hip System and key Trauma products such as the PERI-LOC^à Ankle Fusion Plating System and TRIGEN^à Intramedullary Nails. In addition to this, Memphis is the home to the design and manufacturing process of the VISIONAIRE Patient Matched Instrumentation Sets.

The Mansfield facility focuses on sports medicine related products for minimally invasive surgery including the FAST FIX^à 360 Meniscal Repair System, FOOTPRINT^à PK Suture Anchor, DYONICS^à Platinum Shaver Blades, ENDOBUTTON^à CL Ultra and the HEALICOIL PK suture anchor.

The Aarau, Tuttlingen, Beijing and Warwick facilities produce a large number of products including key Trauma products, the PLUS^à knee and hip range and the BIRMINGHAM^à Hip Resurfacing System. The facility in Oklahoma City deals mainly with the assembly of surgical digital equipment, such as HD560 Camera.

A distribution facility in Baar (Switzerland) serves as the main holding and consolidation point for markets in Europe. In the US, the distribution hub is located in Memphis.

Advanced Wound Management

Advanced Wound Management is headquartered in Hull (UK) which is home to a large proportion of the division’s manufacturing activities. There are also manufacturing facilities in Gilberdyke (UK), Suzhou (China), Curaçao (Dutch Caribbean), Alberta (Canada) and Oklahoma City.

The products made at the Hull site cover the therapies of Exudate Management (Foam products – principally ALLEVYN^à), Burns treatment (ACTICOAT^à) and Wound Closure (OPSITE^à film products). Several brands produced in Hull, such as JELONET^à and BACTIGRAS^à, will be transitioning to Suzhou in 2014.

A key base material used in the production of a large number of dressings is the intermediate bulk rolls of film which are manufactured in the Gilberdyke (UK) facility. The facility in Alberta (Canada) provides specific expertise in the addition of silver coatings onto the ACTICOAT burns range prior to shipping to Hull for the final conversion process into finished dressings.

Our business continued

The Suzhou facility opened in 2009 initially to manufacture some Foam products within Exudate Management. It has since expanded to take on production of some Film Wound Closure products.

NPWT is an area of the business which is growing strongly. The majority of the NPWT components are bought in from third parties and assembled in the Advanced Surgical Devices Oklahoma City facility, with the exception of the dressings used for the PICO product which are manufactured in Hull.

Manufacturing for Advanced Wound Bioactives takes place in Curacao, and at various third party facilities in the US. The products are distributed from a third party logistics facility in San Antonio, Texas.

Advanced Wound Management distribution hubs are located in Neunkirchen (Germany) and Derby (UK) for international distribution, Bedford (UK) for UK domestic distribution and Lawrenceville (Georgia, US) for US distribution.

Medical education

Smith & Nephew is dedicated to helping healthcare professionals improve the quality of care for patients. We are proud to support the professional development of surgeons and nurses by providing them with medical education and training on our Advanced Surgical Devices and Advanced Wound Management products.

Every year thousands of customers attend our state-of-the-art training centres in the US, UK and China and Smith & Nephew courses at multiple hospitals and facilities around the world. Working under expert guidance, attendees refine techniques and learn new skills, whilst experiencing the safe and effective use of our products. We also support healthcare professionals through our online resources such as the Global Wound Academy and, for surgeons, our Education and Evidence website.

1 ESTABLISHED MARKETS

Pioneering e-learning

We have extended our commitment to medical education in 2013 with the launch of Education and Evidence, a new e-learning platform for surgeons to access and share peer-to-peer educational resources. It follows the success of our Global Wound Academy (www.globalwoundacademy.com) which has more than 46,000 registered users.

Education and Evidence supports joint repair and replacement, extremities and trauma specialties. The member-based service at www.smith-nephew.com/education/ hosts more than 1,000 videos, articles, surgical techniques, podcasts, training courses, tablet PC apps and iBooks^TM. It uses an innovative search engine and self-profiling to tailor content to users, while also enabling the sharing of resources with colleagues.

Through these powerful e-learning tools we are delivering on our Strategic Priorities, reinforcing our position in the Established Markets and extending our reach in the Emerging & International Markets.

Sales and marketing

Our customers are the providers of medical and surgical treatments and services in over 90 countries worldwide. The largest single customer worldwide is a purchasing group based in the UK that represented 6% of our worldwide revenue in 2013.

In our Established Markets, our Advanced Surgical Devices are principally shipped and invoiced directly to healthcare providers, hospitals and other healthcare facilities. Certain Advanced Wound Management products are shipped and invoiced to wholesale distributors and others are consigned to distributors that lease the devices to healthcare providers, hospitals and other healthcare facilities and end-users.

Each division operates its own dedicated sales force as the customer for the divisions’ products are usually different. Our US sales forces consist of a mixture of independent contract workers and employees. Sales agents are contractually prohibited from selling products that compete with our products. In most Other Established Markets, each division typically manages employee sales forces directly.

In our Emerging & International Markets we operate through direct selling and marketing operations, and through distributors. In these markets, our Advanced Surgical Devices franchises frequently share sales resources. The Advanced Wound Management sales force may be separate where it calls on different customers.

Our people

Smith & Nephew had over 11,000 employees in 2013. We are committed to attracting, engaging, developing and retaining employees as well as to being a responsible corporate citizen.

Our employees are dedicated to our core values of Innovation, Trust and Performance which represent the foundation of our culture.

Investing in our people and communities helps ensure the long-term sustainability of our business. In 2013, we executed actions to address employee feedback from our Global Survey and also participated in the Great Places to Work survey in many of our markets.

Attracting the best talent and developing and engaging our employees is critical to achieving and sustaining our business objectives and overall performance. Our appointments are made on merit and in alignment with a core set of competencies and values of which ethics and integrity are central. We prioritise the development and promotion of our employees whenever possible.

Each year, Smith & Nephew conducts a comprehensive global development and capability review process to identify high-potential employees and ensure they have career development plans in place. Talented employees are provided with opportunities to develop and grow their skills and career. Current programmes include the CEO Forum, designed to develop talent and provide exposure to the broader business, and the General Managers Meeting, held annually to align these key leaders with the Group’s strategy and goals. In addition, the Board reviews succession plans for key executive roles. We have succession plans for critical positions across our business and have taken proactive steps to recruit specialist and leadership talent to augment our current team.

Our performance management process ensures all employees set objectives which align to our overall business goals. Reward systems are focused on promoting high-performance and ethical behaviour. Our Code of Conduct is an important measure of individual performance. All employees are required each year to complete training and certify their adherence to this Code.

Smith & Nephew strives to create a more engaged and productive workforce and focuses on measures to drive employee engagement. These include an understanding of the Group’s mission and direction, sense of employee involvement, focus and adaptability to customers and market place. We continue to listen to our employees, via regular surveys and focus groups, and we value their opinions.

Diversity at Smith & Nephew

Smith & Nephew believes that diversity fuels innovation. We are committed to employment practices based on equality of opportunity, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability unrelated to the ability of the person to perform the essential functions of the job.

The Board and Executive Officers continue to recognise the importance of diversity and over the last two years have expanded their own diversity profile. Three of our 12 Board members are female.

At 31 December 2013, Smith & Nephew had the following breakdown of employees:


		Number of Employees ¹

Directors
Male		9
Female		3
Total		12

Senior Managers and above ²
Male		484
Female		140
Total		624

Total employees
Male		7,203
Female		4,821
Total		12,024
1 Number of employees as at 31 December 2013 including part time employees and employees on leave of absence.
2 Senior managers and above includes all employees classed as Directors, Senior Directors, Vice Presidents and Executive Officers and includes all statutory Directors of our subsidiary companies.

The Emerging &

International Markets have

become an increasingly

important opportunity

for our products


		Overview In Advanced Surgical Devices (‘ASD’) we develop, manufacture and sell products in the following franchise areas: Orthopaedic Reconstruction Smith & Nephew offers a range of specialist products for orthopaedic reconstruction in its Knee Implants and Hip Implants franchises. Implant bearing surfaces such as the proprietary OXINIUM^àOxidized Zirconium continue to be a point of differentiation for Smith & Nephew. OXINIUM Technology combines the enhanced wear resistance of a ceramic bearing with the superior toughness of a metallic bearing. When combined with highly cross-linked polyethylene (‘XLPE’) it results in our proprietary VERILAST Technology. In Hip Implants, the combination of a ceramicised metal head and a polyethylene lined cup have been shown in joint registry data to have superior five-year survivorship (97.9%) compared to implants made from any other material. In Knee Implants, the LEGION Primary Knee with VERILAST Technology is the only knee implant with a 30-year wear performance claim – more than double the length of wear performance testing of conventional technologies.		Knee Implants Smith & Nephew offers a range of products for specialised knee procedures. The JOURNEY II BCS Total Knee System was launched in the US in 2013. It is designed to restore the normal kinematic motion by replicating the anatomic shapes of a normal, healthy knee. The LEGION/GENESIS^à II Total Knee System is a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to revision. These systems also feature VERILAST Technology, our advanced bearing surface and also utilised VISIONAIRE Patient-Matched Instrumentation. With VISIONAIRE Instrumentation, a patient’s MRI and X-rays are used to create customised cutting blocks that allow the surgeon to achieve optimal mechanical axis alignment of the new implant. In addition, VISIONAIRE also helps save time by reducing the number of steps and instruments needed in the operating room.
		5 SUPPLEMENT GROWTH WITH ACQUSITIONS
		Leadership in India The Emerging & International Markets have become an increasingly important opportunity for our products. The acquisition of India’s Sushrut-Adler, a leader in trauma products, greatly enhanced our portfolio for this fast growing segment. Sushrut-Adler has a long and distinguished history, a reputation for quality products and a loyal customer base. Its trauma portfolio strongly complements our established positions in orthopaedic reconstruction and sports medicine in India. From our enhanced platform we can develop further products for the mid-tier in India and for export. We are delivering on our Strategic Priorities to build leadership positions in the Emerging & International Markets and to bring forward products for these countries.

Segment performance: Advanced Surgical Devices continued

Hip Implants

For Hip Implants, core systems include the ANTHOLOGY Hip System, SYNERGY^à Hip System, the SMF Short Modular Femoral Hip System, the R3 Acetabular System, the POLARCUP^à Dual Mobility Hip System and the SL-PLUS Hip Family System.

In 2013, we launched the SMF Monolithic Hip Stem which is intended to capitalise on the clinically proven flat taper cementless primary stem. The SMF Monolithic Stem family of products allows the surgeon to use the convenience of a one piece stem and the advantage of a short stem.

We also introduced the POLARSTEM^à HA Cementless Stem System in the US for state-of-the-art minimally invasive surgical techniques that preserve bone and soft tissue, with good functionality and reproducible results.

Trauma & Extremities

Our Trauma & Extremities franchise offers both internal and external devices, as well as other products used in the stabilisation of severe fractures and deformity correction procedures.

During 2013, the US business refined its commercial model to increase the focus and resources addressing the opportunities in the high-growth trauma and extremities markets.

For Trauma, the principal internal fixation products are the TRIGEN^à family of IM nails (TRIGEN META-NAIL^à System, TRIGEN Humeral Nail System, TRIGEN SURESHOT^à, and TRIGEN INTERTAN^à) and the PERI-LOC^à Plating System. For extremities and limb restoration, the franchise offers the TAYLOR SPATIAL FRAME^à Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection, and suture anchor products for foot, ankle, hand and wrist surgeons.

2013 saw the introduction of the MODULAR RAIL SYSTEM (‘MRS’) which is designed to correct bone deformities, malunions, non-unions and limb length discrepancies. The MRS takes advantage of the body’s ability to grow new bone tissue.

In Extremities during 2013 we expanded our ALL28^à Foot and Ankle portfolio to include ankle instability and Achilles tendon repair. Ankle instability builds upon our successful TWINFIX^àtitanium anchor technology in a new system specifically designed for foot & ankle surgeons. It allows the surgeon to re-attach or repair the anterior talofibular ligament (‘ATFL’) to the fibula. The Achilles tendon repair solution uses our FOOTPRINT^à Ultra PK Suture Anchor to address traumatic avulsion of the tendon. This technology allows for tension adjustment after anchor insertion up until the inserter is removed, as well as eliminating knot stack on the heel that may cause irritation to the patient post procedure.

Sports Medicine Joint Repair

The Sports Medicine Joint Repair franchise offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including knee, hip and shoulder repair.

Significant launches during the year included the HEALICOIL REGENESORB Biocomposite Suture Anchor, Active Heel Traction Boot and CLANCY^à Depth Gauge.

The HEALICOIL Suture Anchor’s distinctive, open-architecture differs from solid-core implants by eliminating the material between anchor threads, allowing blood and bone marrow from the surrounding cancellous bone to enter the implant. Our proprietary REGENESORB Material is an advanced biocomposite.

Arthroscopic Enabling Technologies (‘AET’)

Our Arthroscopic Enabling Technologies franchise offers healthcare providers a variety of technologies such as fluid management equipment for surgical access; high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joints; radio frequency (‘RF’) probes, electromechanical and mechanical blades, and hand instruments for removing damaged tissue.

Key AET products include DYONICS shaver blades, ACUFEX^àhandheld instruments, and a wide range of radio frequency probes. The DYONICS Platinum Series Shaver Blades are single-use blades that provide superior resection due to their unequalled sharpness and virtually eliminate clogging through their improved debris evacuation capabilities.

The new LED 3000 Light Source launched in 2013 is designed to optimise the HD visualisation experience by providing brilliant illumination through a compact and intuitive interface.

Other ASD

The Other ASD franchise includes smaller businesses such as Gynaecology.

The main Gynaecology product is the TRUCLEAR^à System, a first-of-its-kind hysteroscopic morcellator that pairs continuous visualisation capabilities with minimally invasive tissue removal providing safe and efficient removal of endometrial polyps and submucosal fibroids. The business also sells a hysteroscopic fluid management system, which provides uterine distension and clear visualisation during hysteroscopic procedures.

Segment performance: Advanced Surgical Devices continued

Market and competition

In 2013, weaker economic conditions worldwide continued to create several challenges for the overall surgical devices market, including continued deferrals of joint replacement procedures and heightened pricing pressures.

These factors contributed to the lower overall growth of the worldwide surgical devices market versus historic comparables. However, over the medium term, several catalysts are expected to continue to drive sustainable growth in surgical device procedures, including the growing and ageing population with active lifestyles, rising rates of co-morbidities such as obesity and diabetes, patient desire for minimally invasive procedures, technology improvements allowing surgeons to treat younger, more active patients, and the increasing demand for healthcare in emerging markets.

Orthopaedic and sports medicine procedures tend to be higher in the winter months (quarter one and quarter four in the US and Europe) when accidents and sports related injuries are highest. Conversely, elective procedures tend to slow down in the summer months due to holidays.

Global orthopaedic reconstruction segment

Smith & Nephew estimates that the global orthopaedic reconstruction segment is worth approximately $14 billion and the segment served by Smith & Nephew increased by approximately 3% in 2013. Competitors in the orthopaedic reconstruction segment include Biomet, DePuy Synthes (a division of Johnson & Johnson), Stryker and Zimmer.

Global orthopaedic trauma segment

Smith & Nephew estimates that the global orthopaedic trauma segment is worth approximately $5 billion and the segment served by Smith & Nephew grew by approximately 7% in 2013. Competitors in the orthopaedic trauma segment include Biomet, DePuy Synthes (a division of Johnson & Johnson), Stryker and Zimmer.

Global sports medicine segment

Smith & Nephew estimates that the global sports medicine segment (representing access, resection and repair products) is worth approximately $4 billion and the segment served by Smith & Nephew grew by approximately 6% in 2013. Competitors in the sports medicine segment include Arthrex, DePuy Mitek (a division of Johnson & Johnson) and Stryker.

Regulatory approvals

In 2013, regulatory clearances/approvals were obtained for several key products and instrumentations.

In the US, 510(k) clearance was obtained for Disposable Knee Instruments, SURESHOT^à Distal Targeting System v3.0 (added drill depth measurement functionality), HEALICOIL REGENESORB Suture Anchor, TWINFIX Ti 3.5mm SL Anchor, FOOTPRINT Ultra 4.5mm & 5.5mm SL Anchors, SUTUREFIX^àUltra Suture Anchors and ULTRATAPE^à Suture.

In Europe, we obtained renewals for LEGION Narrow Femoral Components (CE mark approval), ULTRA FAST-FIX^à AB (indications expansion to include meniscal allograft transplantation), Round ENDOBUTTON^à, SCREWBUTTON^à and ULTRA FAST-FIX AB (CE Renewal).

In Canada, the TWINFIX Ti 3.5mm SL Anchor and FOOTPRINT Ultra 4.5mm & 5.5mm SL Anchors were approved.

In Australia, the OSTEORAPTOR^à Curved 2.3 system was approved.

In Japan, we received approvals for SURESHOT Distal Targeting System (two approvals obtained in 2013, including approval of current software version, 3.0), JOURNEY II BCS Knee System, R3 Acetabular System (XLPE Liners and Shells), JOURNEY Uni Knee System (OXINIUM femoral components and all-poly tibial baseplates), JOURNEY Uni Knee System (Articular inserts and tibial baseplates), VISIONAIRE Patient-Matched Cutting Blocks, JOURNEY II CR Knee System, XTENDOBUTTON^à, HEALICOIL PK Suture Anchor, Beaver Blade, TRUCLEAR Hysteroscopic Morcellator system, BIOSURE HA Interference Screw, BIORAPTOR Knotless Anchor and TWINFIX ULTRA HA Suture Anchor.

In our Emerging & International Markets, we obtained a number of regulatory clearances/approvals for several core product lines, as follows:

In China, we received approvals for Ultra FASTFIX and Ultra FASTFIX AB Meniscal Repair System, SURESHOT Distal Targeting Systems, TWINFIX ULTRA HA Suture Anchor, SPYROMITE and DYNOMITE Extremities Suture Achors and LEGION Primary Knee System – POROUS Femoral Component with HA Coating.

In Russia, we obtained approval to market our Multiple Knee Systems including JOURNEY UNI, GENESIS II, LEGION and TC_PLUS.

In Mexico, the OXINIUM Femoral Components, R3 Acetabular System, REDAPT Instruments, Cannulated Screw Systems were approved for distribution.

Segment performance: Advanced Wound Management continued


Overview						4 SIMPLIFY & IMPROVE OUR OPERATING MODEL

In Advanced Wound Management (‘AWM’) we offer products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds associated with the older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of acute wounds such as burns and invasive surgery that impact the wider population. The main products within the AWM business are for Exudate management, Infection management, NPWT and Bioactives. AWM has its global headquarters in Hull, UK and its North American headquarters in St Petersburg, Florida. Advanced Wound Care Exudate management Exudate management products focus on effectively and efficiently locking away wound fluid and creating an optimal healing environment to ensure better healing outcomes. Our key brands in this space are ALLEVYN foam dressings and DURAFIBER gelling fibre dressings. During 2013, we continued to invest in the commercialisation of ALLEVYN Life, our latest innovation in foam dressings, designed to provide a better quality of life to the patient during the healing process. In several studies this has resulted in better patient satisfaction, longer wear times and overall reduced healthcare management costs. One recent article published in the Journal of Community Nursing stated “In employing a design intended to combat the common problems of living with a wound, such as exudate leakage and conformability, the dressing has the potential to improve wound management practice and reduce the use of associated resources, such as nursing time”. The article concluded that around 2,500 working days could be saved annually as a result of using ALLEVYN Life. DURAFIBER has continued to grow over the course of 2013, with customers switching from other products within the gelling fibre segment. Infection management AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT, DURAFIBER Ag and ALLEVYN Ag) and iodine (IODOSORB^à). The iodine-based IODOSORB product has continued to gain interest as biofilms become a more important topic in wound care. We launched DURAFIBER Ag in 2013 and with it entered the silver gelling fibre market, one of the largest segments of the infection management market.						Expanding Suzhou In April distinguished guests from Suzhou Industrial Park and Jiangsu Province attended the official opening of the major extension to Smith & Nephew’s Advanced Wound Management manufacturing facility in Suzhou, China. The expansion more than doubled the size of the Suzhou facility, and is enabling Smith & Nephew to continue to develop its product portfolio both for the Chinese market and for export. Those manufactured at Suzhou include ALLEVYN, Smith & Nephew’s leading foam dressing brand, which is used in the treatment of hard to heal wounds such as leg ulcers, as well as new portfolios for the mid-tier across the Emerging & International Markets. Completed on time, to budget, and without a lost-time incident, the extension takes the total floor area to 27,000 square meters and doubles the production capacity to over 100 million wound dressings a year. We are delivering on our Strategic Priority to Simplify and Improve our Operating Model by optimising our global manufacturing footprint. China is of great strategic importance to Smith & Nephew. We are proud of what we have achieved here and are investing for the long term. We now have more than 900 people in China, working across manufacturing and commercial operations. We have built our success upon a sustainable and ethical approach to business, and are bringing this long-term commitment to our work, our employees and our communities.

Other

We also offer a wide range of other wound care products, which means we have one of the most comprehensive ranges of wound care solutions in the industry. These products include our film and post-operative dressings, skincare products and gels.

ADERMA: Following the acquisition and integration of ADERMA pressure relieving technology in 2012, the launch in the UK and increase in ADERMA sales activity has seen it firmly established as the market leader. The UK government’s targeting of Pressure Ulcer Prevention and the known cost to the UK health system has driven the adoption of ADERMA in both the Acute and Community sectors. Due to the success in the UK, plans are in place to launch ADERMA as Dermapad in 2014 into other healthcare markets with equally strong Pressure Ulcer Prevention drivers. With our Skincare portfolio, ADERMA/ Dermapad and ALLEYVN Life, we are well placed to deliver a strong and comprehensive Pressure Ulcer Prevention and treatment solution through a tested and validated value proposition into the Established Markets.

IV 3000: AWM’s specialist breathable premium IV dressing, utilising REALTIC^à film technology and unique patterned adhesive, continues to perform well, particularly driven by emerging markets. Success in these markets and elsewhere has identified an opportunity for a mid-tier offering.

OPSITE POST OP VISIBLE: This is our innovative dressing that combines the qualities of a premium dressing with the ability to see the incision. This unique product continues to deliver strong growth in both our Established and Emerging & International Markets as its adoption becomes more widespread backed by good clinical evidence.

Advanced Wound Devices

Advanced Wound Devices consists of two categories of products; NPWT and VERSAJET^à.

NPWT

Our NPWT solutions include traditional NPWT products (RENASYS^à products) and the single-use portfolio (PICO and KALYPTO^à products).

In its sixth year on the market, our RENASYS traditional NPWT brand has seen continuous improvement and innovation. Product updates in 2013 enhanced both function and user experience with our RENASYS systems as a whole. The RENASYS product offering now includes multiple device options, a choice of foam or gauze dressings, along with a range of drains and specialty kits.

The PICO system, our single-use, canister-free solution is revolutionising NPWT. As familiar and easy to use as an advanced wound dressing, PICO provides an active intervention to help promote optimal healing for early discharge and enhanced outcomes in complex cases. PICO simplifies NPWT.

VERSAJET

The VERSAJET Hydrosurgery system is a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wound, burns and soft tissue injuries.

Advanced Wound Bioactives

Bioactives represent the fastest growing category of chronic wound therapeutics. Our diversified biotherapeutic portfolio offers novel, cost-effective solutions for tissue repair and healing, addressing the full spectrum of hard-to-heal wounds.

Currently, our leading product is Collagenase SANTYL^àOintment, the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns. Other products include: REGRANEX^à Gel, a FDA-approved platelet-derived growth factor; and the OASIS^àfamily of naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds.

Additionally, the lead candidate in our bioactive pipeline is HP802-247, an investigational allogeneic living cell bioformulation containing keratinocytes and fibroblasts. HP802-247 is currently in Phase III for the treatment of venous leg ulcers following positive Phase IIb clinical trial results, which were recently published in The Lancet.

Segment performance: Advanced Wound Management continued

Market and competition

The AWM market is focused on the treatment of chronic wounds of the older population and other acute hard-to-heal wounds such as burns and certain surgical wounds and is therefore expected to benefit from demographic trends. Growth is driven by an ageing population and by a steady advance in technology and products that are more clinically efficient and cost-effective than their conventional counterparts. The market for advanced wound treatments is relatively unpenetrated and it is estimated that the potential market is significantly larger than the current market. Management believes that the market will continue the trend towards advanced wound products with their ability to accelerate healing rates, reduce hospital stay times and cut the cost of clinician and nursing time as well as aftercare in the home.

Smith & Nephew estimates that the global wound management segment is worth approximately $7 billion and the segment served by Smith & Nephew grew by 4% in 2013. Global competitors vary across the various product areas and include Coloplast, Convatec, Kinetic Concepts and Molnlycke.

The 2013 Global NPWT market was flat versus 2012. Price pressures continue to offset the increase in patient therapy volumes. Price pressures have increased in some key markets due to competition, competitive bidding and reimbursement changes. Market size is estimated to be $2 billion.

Due to the nature of its product range there is little seasonal impact on the Advanced Wound Management business.

Regulatory approvals

In 2013, regulatory clearance was obtained for ALLEVYN Life Heel in the EU, US and Australia. ELECT^à Super absorber was also approved in Europe. The complete range of DURAFIBER Ag sized dressings was approved in Europe and the US.

ALLEVYN Ag Gentle and ALLEVYN Ag Gentle Border were both approved in Japan. ALLEVYN Gentle Border and ALLEVYN Gentle were approved for import into China.

PICO Single Use Negative Wound Therapy System was approved in Brazil, Russia, Mexico and Korea.

The next generation VERSAJET II system was approved in Japan, China as well as several other Emerging & International Markets.

The RENASYS^à EZ PLUS pump and RENASYS Foam and Gauze dressing kits were approved in China.

RENASYS EZ MAX Negative Pressure Wound Therapy pump also received clearance in the US, EU and Australia.

RENASYS EZ PLUS and RENASYS GO were both certified as compliant with the third edition of IEC 60601 an important standard for the safety of electro-medical devices.

2 EMERGING & INTERNATIONAL MARKETS

Building our product portfolio and commercial platform

We are building strong businesses in the Emerging & International Markets by having close, direct relationships with our customers – and by developing product portfolios that meet the needs of patients in the economic mid-tier.

In 2013 we furthered this strategy. Our first mid-tier product, a low cost camera system, was launched. We also acquired a portfolio of orthopaedic trauma products in India. By developing and manufacturing in the Emerging & International Markets we are able to deliver both quality and value.

We also completed acquisitions of distributors in Turkey and Brazil. Both these markets are fast-growing and offer exciting opportunities. These are important investments which will create a significant platform from which we can grow.

Smith & Nephew is delivering on its strategic priority to build a sustainable business in the Emerging & International Markets.

Smith & Nephew promotes sustainability to our stakeholders through addressing economic, social and environmental considerations. In turn, our sustainability strategy is aligned with the strategic priorities.


		1 ESTABLISHED MARKETS
		Making best environmental choices and manufacturing and supply chain efficiencies all contribute to reducing our cost base, facilitating access to our products and helping our customers meet their sustainability ambitions.
		2 EMERGING & INTERNATIONAL MARKETS
		Cost base reductions facilitate wider access to our products. Specifically our focus on mid-tier products is aimed at supporting fundamental and affordable healthcare in the Emerging & International Markets.
		3 INNOVATE FOR VALUE
		Building sustainability into our New Product Development processes, including reducing packaging and waste, helps us innovate to meet our customers’ expectations, deliver mutual value and optimise patient care.
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
		Incorporating sustainability into our business processes and optimising our facilities and supply chain to reduce our resource consumption and environmental impact help meet the expectations of our customers and society. Protecting our employees through the implementation of global HSE standards and responsible behaviours is not only right but also adds value to our business.
		5 SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS
		Our due diligence approach includes sustainability considerations, our global policies and standards to ensure we protect the integrity and reputation of our business. Specifically our acquisition of Sushrut-Adler in India is aimed at providing fundamental and affordable healthcare into the emerging markets.

Sustainability strategy and targets

Progress towards the 2015 targets has been indexed to the baseline year 2011.

Target by 2015


Reduce non-renewable energy use by 15%
-0.6%		Energy consumption is decreasing but not in line with expectations. This is largely influenced by higher energy use in China as we scale up for expansion. The increased production levels at our Suzhou, China plant have given rise to an underlying increase in Group energy usage of 2.6%.
Reduce CO₂ emissions by 15%
+0.8%		CO₂ emissions reflect different carbon footprints of energy production in different geographic locations. Increasing production capacity at the Suzhou plant has contributed to an underlying increase in the carbon emissions of 3.6%. The carbon footprint in China is roughly twice that of the UK.
Reduce water use by 15%
+11.9%		Water usage continues to rise as new facilities are commissioned and we make operational choices based on best environmental options. For example, as we have expanded at Suzhou we have chosen to use a cooling system based on evaporation to reduce energy consumption.
+7.6%		Water consumption at Memphis and Suzhou account for 84% of our total water usage and when excluded the increase was 7.6%.
Reduce packaging materials by 15%
		We are evaluating all the options for reducing packaging whilst maintaining product safety and protection. This is a challenging area and details and examples of projects will be available in our Sustainability Report.
Reduce total waste by 15%
+15.1%		In 2013, there were two exceptional waste sources that contributed to the increase in total waste generated by the business. Specifically these were from the validation of manufacturing start-up in China and the disposal of obsolete stock in the US. We continue to focus on waste reduction at source and recycling opportunities.
-21.7%		The landfill component of our total waste was reduced by 21.7%.
Increase % of total waste recycled by 15%
+21.2% (Excludes waste to energy)		Recycling of wastes continues to rise as more opportunities are exploited. We are now reporting separately the waste that is diverted for energy recovery.

Safety performance


Safety Reporting	2013		2012		2011
OSHA recordable incidents per 200,000hrs worked (TIR)		1.11		1.09		1.16
Lost time incidents per 200,000hrs worked (LTIFR)		0.48		0.51		0.58
Number of lost time incidents arising from manufacturing facilities		25		37		42

There were no fatalities. Lost time injuries in our manufacturing facilities decreased by 32% over the previous year. However, the number of injuries in our non-manufacturing and supply chain operations increased mainly due to car accidents. Improving driving safety is a particular priority in 2014. We are making significant progress with the deployment of risk based control processes and our new HSE Integrated Management System.

Greenhouse gases

Methodology, materiality and scope

We are reporting on the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These sources fall within our consolidated financial statement. We have used the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition) as guidance for this process.

The focus of our data collection has been on the areas of the business that have the most influence on our environmental impacts and provide stakeholders with a level of detail that enables them to monitor emissions data, sustainability management and trends. Wherever possible, primary data from energy suppliers has been used.

The largest proportion of our environmental impacts is from manufacturing, warehousing and research. Sales locations are included however some smaller, leased or shared offices are not reported. We estimate that these exclusions represent less than 2% of our overall emissions.

The Biotherapeutics business (acquired at the end of 2012) is excluded from these figures along with other more recent acquisitions during 2013. This is in line with our established policy for integration of acquired assets.

Our emissions have been calculated by using specific emissions factors for each country outside the US and regional factors within the US. We have used the US EPA ‘Emissions & Generation Resource Integrated Database’ (eGRID) for US regions and the UK Government DEFRA Conversion Factors for Greenhouse Gas Reporting for elsewhere. We believe that these factors are the most appropriate to use for our business and give more accurate conversion rates than the conversion factors we have used in previous Sustainability Reports. The emissions from 2011, our baseline year for the sustainability targets, have therefore been recalculated using consistent rates. Fugitive emissions are included from the manufacturing and research locations and arise from the losses of refrigerant gases.

During the year, we have continued to make progress in reducing our energy consumption at many of our operational facilities. CO₂ emissions have not reduced in line with energy due to the different carbon footprints of energy production in different geographic locations, particularly China.


	2013		2012		2011
Global GHG emissions data for current reporting year and comparisons
CO₂e emissions (tonnes) from:
Combustion of fuel and operation of facilities (process and fugitive)		10,102		10,922		10,894
Purchased electricity, heat and steam		66,659		64,991		65,241
Total		76,761		75,913		76,135
Intensity Ratio
Emissions (total) normalised to:
CO₂e (t) per $m revenue (i) CO₂e (t) per full-time employee (ii)		18.9 7.3		18.3 7.2		17.8 7.1

Notes

2013 data adjusted to exclude Healthpoint.

(i) Revenue data: 2013: $4,071m, 2012: $4,137m, 2011: $4,270m.

(ii) Full-time employee data: 2013: 10,520, 2012: 10,477, 2011: 10,743.

Support for community

In 2013, Smith & Nephew’s support for community charitable causes, grants, sponsorships and third party medical education was $10m.

For more information on sustainability see our

Website www.smith-nephew.com/sustainability

Our 2013 Sustainability Report will be published in spring 2014.

References

Emission factors have been taken from the following source:

–	UK Government DEFRA Conversion Factors for Greenhouse Gas Reporting, http://www.ukconversionfactorscarbonsmart.co.uk/

Emission factors for electricity from locations in the US have been taken from the following source:

–	US EPA ‘Emissions & Generation Resource Integrated Database’ (eGRID) http://www.epa.gov/cleanenergy/energy-resources/egrid/index.html

Revenue by market

The underlying increase in each division’s revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in accordance with IFRS, as follows:


	2013 $m		2012 $m		Reported growth in revenue %			Constant currency exchange effect %		Acquisition /Disposal effect %			Underlying growth in revenue %
Advanced Surgical Devices
US		1,391		1,449		(4	)		–		5			1
Other Established Markets		1,204		1,298		(7	)		2		2			(3	)
Established Markets		2,595		2,747		(6	)		1		4			(1	)
Emerging & International Markets		420		361		16			2		–			18
Advanced Surgical Devices		3,015		3,108		(3	)		1		3			1

Advanced Wound Management
US		471		202		133			–		(111	)		22
Other Established Markets		722		705		3			1		(1	)		3
Established Markets		1,193		907		32			1		(23	)		10
Emerging & International Markets		143		122		17			3		–			20
Advanced Wound Management		1,336		1,029		30			1		(20	)		11

Advanced Surgical Devices

Revenue

ASD revenue decreased by $93m (-3% on a reported basis) from $3,108m in 2012 to $3,015m in 2013. The underlying increase of 1% is after adjusting for a net 3% adverse impact from the disposal of the Clinical Therapies business in 2012 and the acquisitions completed in quarter four 2013, and a 1% unfavourable foreign currency translation.

In the US, revenue decreased by $58m to $1,391m in 2013 from $1,449m in 2012 (-4% on a reported basis). The underlying increase of 1% is after adjusting 5% for the adverse impact of the Clinical Therapies disposal in 2012. In Other Established Markets, revenue was $1,204m in 2013, a decrease of $94m from $1,298m in 2012 (-7% on a reported basis). The underlying decrease was 3% after adjusting for the adverse impact of 2% on the Clinical Therapies disposal in 2012, and 2% from unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $59m to $420m in 2013 from $361m in 2012 (16% increase on a reported basis). The underlying increase was 18% after adjusting 2% for unfavourable foreign currency translation.

In the global Knee Implant franchise, revenue decreased by $9m from $874m in 2012 to $865m in 2013 (-1% on a reported basis), representing flat underlying revenue performance after 1% of unfavourable currency translation. Growth has been impacted by exposure to a weakening European market with conditions continuing to deteriorate in Germany, our largest European market, and our position in the product life cycle versus our peers. Growth improved in the second half of the year driven by sales of the Journey II BCS Knee System and benefits from the VERILAST bearing surface TV advertising campaign in the US.

Global revenue from the Hip Implant franchise decreased by $13m from $666m in 2012 to $653m in 2013 (-2% on a reported basis), which represented an underlying revenue decline of 1% after 1% unfavourable foreign currency translation. Continuing metal-on-metal headwinds have contributed to this decline.

Trauma & Extremities revenue increased by $12m from $474m in 2012 to $486m in 2013 (3% on a reported basis). This represents underlying revenue growth of 4% after 1% of unfavourable foreign currency translation. During 2013, benefits were seen from the additional extremities US sales representatives recruited earlier in the year.

Sports Medicine Joint Repair revenue increased by $22m from $474m in 2012 to $496m in 2013 (5% on reported basis), representing underlying revenue growth of 7% and 2% of unfavourable foreign currency translation. This reflects a strong contribution across all key joint types and geographies.

Global revenue from Arthoscopic Enabling technologies decreased by $17m from $458m in 2012 to $441m in 2013 (-4% on a reported basis). This decrease represents an underlying revenue decline of 2% and 2% of unfavourable foreign currency translation.

The revenue in the Other ASD franchise fell by $88m from $162m in 2012 to $74m in 2013 following the disposal of the Clinical Therapies business in 2012. Excluding the impact of this disposal, underlying revenue in the Other ASD franchise, which includes gynaecology, grew by 14% with the remaining Clinical Therapies geographies contributing $9m.

Financial review and principal risks continued

Trading and operating profit

Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:


	2013 $m		2012 $m

Operating profit		620		632

Acquisition related costs		7		–

Restructuring and rationalisation costs		44		57

Amortisation of acquisition intangibles and impairments		41		39
Trading profit		712		728

Trading profit margin increased from 23.4% to 23.6%. Trading profit decreased by $16m to $712m from $728m in 2012. This decrease reflects the impact of the CT disposal in May 2012, the impact of the US medical device excise tax and the cost of planned investments in the Knee Implants and Trauma franchises and Emerging & International Markets offset by benefits from our structural efficiency programme.

Operating profit decreased by $12m from $632m in 2012 to $620m in 2013. This comprises the decrease in trading profit of $16m discussed above, an increase in acquisition related costs of $7m, an increase in amortisation of acquisition intangibles of $2m, partially offset by a decrease in restructuring and rationalisation costs of $13m.

Advanced Wound Management

Revenue

AWM revenue increased by $307m (30% on a reported basis), from $1,029m in 2012 to $1,336m in 2013. The underlying increase of 11% is after adjusting for an increase of 20% for the acquisitions completed in the year and a 1% unfavourable foreign currency translation.

In the US, revenue increased by $269m to $471m in 2013 from $202m in 2012 (133% on a reported basis). The underlying increase of 22% is after adjusting 111% for the impact of acquisitions. In Other Established Markets, revenue was $722m in 2013, an increase of $17m from $705m in 2012 (3% on a reported basis). The underlying revenue increase was also 3% with the 1% impact of acquisitions offset by 1% of unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $21m in 2012 (17% on a reported basis). The underlying increase was 20% after adjusting 3% for unfavourable foreign currency translation.

Advanced Wound Care revenue decreased by $6m (-1% on a reported basis) from $849m in 2012 to $843m in 2013. The underlying growth of 1% is after adjusting for foreign currency translations. Conditions across many European markets remain challenging but the introduction of the ALLEVYN Life range continues to make good progress across Europe following product introductions and investment in marketing.

Advanced Wound Devices revenue increased from $180m in 2012 to $213m in 2013, a reported increase of $33m and 18%. The underlying growth of 20% is after adjusting for unfavourable foreign currency translations of 2%. This growth was impacted by continued gain in market share in NPWT, and our recent expansion into the emerging markets.

Advanced Wound Bioactives revenue of $280m in 2013 (2012 – $nil) relates to Healthpoint acquired in December 2012. The underlying increase, adjusted to include the results of Healthpoint for the commensurate period in 2012, was 47%.

Trading and operating profit

Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:


	2013 $m		2012 $m

Operating profit		190		214

Acquisition related costs		24		11

Restructuring and rationalisation costs		14		8

Amortisation of acquisition intangibles and impairments		47		4
Trading profit		275		237

Trading profit margin decreased from 23.1% to 20.6%. Trading profit increased by $38m to $275m from $237m in 2012. The increase in the year is primarily attributable to the full year benefit of the Healthpoint acquisition and growth in the Emerging & International Markets, partially offset by additional investment in R&D and sales and marketing. The decrease in trading margin reflects these same investments, combined with price and mix changes at a gross margin level.

Operating profit decreased by $24m from $214m in 2012 to $190m in 2013. This comprises of the increase in trading profit of $38m discussed above, offset by an increase of $43m in amortisation of acquisition intangibles and an increase in acquisition related costs of $13m, both due to the Healthpoint acquisition which completed in December 2012, and an increase in restructuring and rationalisation costs of $6m.

Principal risks and risk management

As an integral part of planning and review Group, business area and functional management seek to identify the significant risks involved in the business, and to review the risk management action plans for those risks. The Group Risk Committee, which is comprised of the Chief Executive Officer and Senior Executives, meets twice a year to review the risks identified by the businesses and corporate functions and any risk management actions being taken. As appropriate, the Risk Committee may re-categorise risks or require further information on the risk management action plans. The Risk Committee reports to the Board on an annual basis detailing all principal risks. In addition, the Board considers risk as part of the development of strategy. Internal audit reviews and the Audit Committee reports on the effectiveness of the operation of the risk management process.

There are known and unknown risks and uncertainties relating to Smith & Nephew’s business. The following pages provide an overview of what the Board considers the most significant risks that could cause the Group’s business, financial position and results of operations to differ materially and adversely from expected and historical levels, and how these risks relate to the Group’s strategic priorities. In addition, other factors not listed here that Smith & Nephew cannot presently identify or does not believe to be equally significant, could also materially adversely affect Smith & Nephew’s business, financial position or results of operations.

LOGO


Disruptive technologies
The medical devices industry has a rapid rate of new product introduction. The Group must be adept at monitoring the landscape for technological advances, make good investment/acquisition choices, have an efficient and valuable product pipeline and secure protection for its intellectual property.
Specific risks we face	Risk management actions	Possible impacts

– Competitors may introduce a disruptive technology, or obtain patents or other intellectual property rights, that affect the Group’s competitive position – Claims by third parties regarding infringement of their intellectual property rights – Lack of innovation due to low R&D investment, R&D skills gap or poor product development execution for Established and Emerging & International Markets – Failure to successfully commercialise a pipeline product, or failure to receive regulatory approval – Ineffective acquisition due diligence, valuation, purchase terms or integration.	– Processes focused on identifying new products and potential disruptive technologies (internal and external) – Increasing productivity, prioritisation and allocation of R&D funds – Increasing R&D investment in order to enhance clinical capability, invest in biomaterials – Strengthen intellectual property rights – Support an emerging market portfolio – Business development resources and processes and investments to augment the internal product development – Increasing speed to market of new products.	Loss of market share, profit and long-term growth.
		Link to Strategic Priority
		3 INNOVATE FOR VALUE
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
		5 SUPPLEMENT THE ORGANIC GROWTH THROUGH ACQUISITIONS

Financial review and principal risks continued

Country risk, pricing and reimbursement pressure

In most markets throughout the world, expenditure on medical devices is controlled to a large extent by governments, many of which are facing increasingly intense budgetary constraints. The Group is therefore largely dependent on governments providing increased funds commensurate with the increased demand arising from demographic trends. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. Political upheaval in the countries where the Group operates or surrounding regions could adversely affect Group operations or turnover.

Group operations are affected by transactional exchange rate movements. The Group’s manufacturing cost base is situated in the US, UK, China and Switzerland and finished products are exported worldwide.


Specific risks we face	Risk management actions	Possible impacts

– Reduced reimbursement levels and increasing pricing pressures – Reduced demand for elective surgery – Increased focus on health economics – Government policies favouring lower priced and locally sourced products – Political upheavals prevent selling of products, receiving remittances of profit from a member of the Group or future investments in that country – The Group is exposed to fluctuations in exchange rates. If the manufacturing country currencies strengthen against the selling currencies, the trading margin may be affected – Economic downturn impacts demand and collections – Increased generic and low cost products could impact revenue and profits.	– Develop innovative economic product and service solutions for both Established and Emerging & International Markets – Incorporate health economic component into design and development of new products – Enhanced expertise supporting reimbursement strategy and guidance – Optimise cost to serve to protect margins and liberate funds for investment – Streamline COGS, SKUs, and inventory management – The Group may transact forward foreign currency commitments when firm purchase orders are placed to reduce exposure to currency fluctuations.	Loss of revenue, profit and cash flows.
		Link to Strategic Priority
		1 ESTABLISHED MARKETS
		2 EMERGING & INTERNATIONAL MARKETS
		3 INNOVATE FOR VALUE
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Supply, system and site disruption

Unexpected events could disrupt the business by affecting either a key facility or system or a large number of employees.

The business is also reliant on certain key suppliers of raw materials, components, finished products and packaging materials.


Specific risks we face	Risk management actions	Possible impacts

– Catastrophe could render one of the Group’s production facilities out of action – A significant event could impact key leadership or a large number of employees – Issues with a single source supplier of a key component and failure to secure critical supply – A severe IT fault or cyber crime could disable critical systems and cause loss of sensitive data.	– Ensure crisis response/business continuity plans at major facilities and for key products and key suppliers – Audit programme for critical suppliers and second sources or increased inventories for critical components – Implement enhanced travel security and protection programme – IT disaster and data recovery plans are in place and support overall business continuity plans – Mobile device and cyber security protection plan implementation.	Loss of revenue, profit and cash flows.
		Link to Strategic Priority
		1 ESTABLISHED MARKETS
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Product safety, regulation, and litigation

National regulatory authorities enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products and may also inspect for compliance with appropriate standards, including those relating to Quality Management Systems (‘QMS’) or Good Manufacturing Practice (‘GMP’) regulations. Design or manufacturing defects in products could result in product recalls and liability claims and impact revenues, profits and reputation.


Specific risks we face	Risk management actions	Possible impacts

– Defective products supplied to Smith & Nephew or failure in design or manufacturing process – New technology, product or processes changed by Smith & Nephew or supplier do not identify product deficiencies	– Standardise the Group’s quality management and practice – Monitoring and auditing programmes to assure compliance – Group-wide product complaint and registration systems	Loss of revenue, profit and reduction in share price. Negative impact on brand/reputation.
– Failure to implement programmes and supporting resources to manage quality and regulatory compliance	– Group-wide practices to drive design, and production line performance and dependability	Link to Strategic Priority
– Failure to manage, process and analyse customer complaints and adverse event data.	– Design for manufacture in product development – Post launch review of product safety and complaint data.	3 INNOVATE FOR VALUE
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Compliance with laws and regulations

Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many countries is towards increased enforcement activity. The Group is also subject to increased regulation of personal information. Acquisitions and expansion into emerging markets could also require additional compliance resources.


Specific risks we face	Risk management actions	Possible impacts
– Violation of healthcare, data privacy or anti-corruption laws could result in fines, loss of reimbursement and impact reputation – Serious breaches could potentially prevent the Group from doing business in a certain market – Failure to conduct adequate due diligence or to integrate appropriate internal controls into acquired businesses could result in fines and impact return on investment.	– Strong Group oversight bodies with supporting global compliance resources – Code of Conduct/Global Policies and Procedures (‘GPPs’) providing controls for significant compliance risks – Training and e-resources to guide employees and third parties with compliance responsibilities – Monitoring and auditing programmes to verify implementation – Independent reporting channels for employees and third parties to report concerns with confidentiality – Additional controls for interactions with healthcare professionals and government officials and for distributors and agents – Due diligence reviews and integration plans required for acquisitions.	Loss of profit and reduction in share price. Negative impact on brand/reputation.
		Link to Strategic Priority
		1 ESTABLISHED MARKETS
		2 EMERGING & INTERNATIONAL MARKETS
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
		5 SUPPLEMENT ORGANIC GROWTH THROUGH ACQUISITIONS

By order of the Board, 26 February 2014

LOGO

Susan Swabey

Company Secretary

Our Board has the depth and breadth of experience necessary to help the business take full advantage of the opportunities and challenges ahead.


The Rt. Hon Baroness Virginia Bottomley (65) Independent Non-executive Director Baroness Virginia Bottomley was appointed Non-executive Director in April 2012. She is a member of the Remuneration Committee. Baroness Virginia Bottomley has extensive experience and understanding of healthcare. She was appointed a Life Peer in 2005 following her career as a Member of Parliament between 1984 and 2005. She served successively as Secretary of State for Health and then National Heritage. She holds a number of positions within the public and private healthcare sector. Other Directorships – Director of International Resources Group Limited – Member of the International Advisory Board of Chugai Pharmaceutical Co., – Chancellor of University of Hull and Sheriff of Hull – Pro Chancellor of the University of Surrey – Governor of the London School of Economics – Trustee of The Economist Newspaper Nationality British	Michael Friedman (70) Independent Non-executive Director Michael was appointed Non-executive Director and elected by Shareholders at the Annual General Meeting on 11 April 2013. He is a member of the Ethics & Compliance Committee. Michael was formerly Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California and is now Executive for Special Projects and Emeritus Cancer Center Director. He has also served as director of the institution’s comprehensive cancer centre and held the Irell & Manella Cancer Center Director’s Distinguished Chair. He was formerly senior vice president of research, medical and public policy for Pharmacia Corporation and has served as Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration. He has also served on a number of Boards in a Non-executive capacity, including RiteAid Corporation. Other Directorships – Non-executive Director of Celgene Corporation – Non-executive Director of MannKind Corporation Nationality American	Pamela Kirby (60) Independent Non-executive Director Chairman of the Ethics & Compliance Committee Pamela was appointed Non-executive Director in March 2002 and Chairman of the Ethics & Compliance Committee in April 2011. She is a member of the Remuneration Committee Pamela has extensive commercial and product development experience within the international pharmaceutical and healthcare industry. Her last executive position was Chief Executive of Quintiles Transnational Corporation in the US, having previously held senior positions in various pharmaceutical companies including AstraZeneca PLC and F. Hoffmann-La Roche. She is now a Non-executive Director of a number of international companies. Other Directorships – Non-executive Chairman of Scynexis, Inc. – Senior Independent Non-executive Director of Informa plc – Non-executive Director of DCC plc – Non-executive Director of Victrex plc Nationality British

Brian Larcombe (60) Independent Non-executive Director Brian was appointed Non-executive Director in March 2002. He is a member of the Nomination & Governance, Audit and Remuneration Committees. He will become Senior Independent Director following the Annual General Meeting on 10 April 2014. Brian spent his career in private equity with 3i Group. After leading the UK investment business for a number of years, he became Finance Director and then Chief Executive of the Group following its flotation. He is well known in the City and has held a number of Non-executive Directorships. Other Directorships – Non-executive Director of gategroup Holding AG – Non-executive Director of Incisive Media Holdings Limited Nationality British	Joseph Papa (58) Independent Non-executive Director Chairman of the Remuneration Committee Joseph was appointed Non-executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011. He is a member of the Ethics & Compliance and Audit Committees. Joseph has had over 30 years’ experience in the pharmaceutical industry working for a number of companies both in the US and Switzerland. He is now Chairman and Chief Executive of Perrigo Company plc, one of the largest over the counter pharmaceutical companies in the US, having previously held senior positions at Novartis International AG, Cardinal Health, Inc. and Pharmacia Corporation. Other Directorships – Chairman and Chief Executive of Perrigo Company plc Nationality American	Ajay Piramal (58) Independent Non-executive Director Ajay was appointed Non-executive Director in January 2012. He will retire from the Board following the Annual General Meeting on 10 April 2014. Ajay is one of India’s most respected businessmen. He enabled the Piramal Group to transform from a textile-centric group to a conglomerate in diversified areas. He has extensive industry and market knowledge and international experience. He has held a number of global healthcare leadership positions in both India and internationally. Other Directorships – Chairman of Piramal Enterprises Limited, Piramal Glass Limited, Allergan India Pvt. Limited, and IndiaREIT Fund Advisers Pvt. Ltd. – Chairman of the Board of Governors of the Indian Institute of Technology, Indore – Member of the Board of Dean’s Advisors at Harvard Business School – Chairman of Pratham India Nationality Indian


Francisco Canal Vega (52) President, Latin America Francisco joined Smith & Nephew in January 2012 and now leads the Latin American region, focusing on driving the substantial opportunities we see in this region. Previous Experience Francisco has held senior management positions in global companies including Gambro AB and Baxter International. He has lived and worked in many countries including Switzerland, Germany, China, Japan, the US and Spain. Francisco was also formerly a board member of EUCOMED. Nationality Spanish	Jack Campo (59) Chief Legal Officer Jack joined Smith & Nephew in June 2008 and heads up the Global Legal function. Initially based in London, he has been based in Andover, Massachusetts since late 2011. Previous Experience Prior to joining Smith & Nephew, Jack held a number of senior legal roles within the General Electric Company, including seven years at GE Healthcare (GE Medical Systems) in the US and Asia. He began his career with Davis Polk & Wardwell. Nationality American	Gordon Howe (51) President, Global Operations Gordon joined Smith & Nephew in 1998 and, since 2013, is responsible for manufacturing, supply chain and procurement, IT systems and Regulatory and Quality Affairs. Prior to that, he headed up the Global Planning and Business Development teams. He is based in Memphis, Tennessee. Previous Experience Gordon has held a number of senior management positions within the Smith & Nephew Group, firstly in the Orthopaedics division and more recently at Group level. Prior to joining the Company, he held senior roles at United Technologies Corporation. Nationality American

Helen Maye (54) Chief Human Resources Officer Helen joined Smith & Nephew in July 2011 and leads the Global Human Resources and Internal Communications functions. Since 2013, she has also led the Sustainability, Health, Safety & Environment functions. She is based in London. Previous Experience Helen has more than 35 years’ experience across a variety of international and global roles in medical devices and Pharmaceuticals, including manufacturing, supply chain and human resources. Previously, she was Divisional Vice President of Human Resources at Abbott Laboratories. Nationality Irish	Cyrille Petit (43) Chief Corporate Development Officer Cyrille joined Smith & Nephew in May 2012 and leads the Corporate Development function. He is based in London. Previous Experience Cyrille spent the previous 15 years of his career with General Electric Company, where he held progressively senior positions beginning with GE Capital, GE Healthcare and ultimately as the General Manager, Global Business Development of the Transportation Division. Cyrille’s career began in investment banking at BNP Paribas and then Goldman Sachs. Nationality French

BOARD GENDER

BOARD NATIONALITY

BOARD BALANCE

BOARD COMMITTEE MEMBERSHIP AND ATTENDANCE

Board

8 meetings

Audit

Committee

8 meetings

Nomination &
Governance
Committee

5 meetings

Ethics &
Compliance
Committee

4 meetings

Remuneration
Committee

5 meetings

Sir John Buchanan

–

Olivier Bohuon

–

Ian Barlow

–

Julie Brown (i)

–

Michael Friedman (ii)

–

Baroness Virginia Bottomley

Pamela Kirby

Brian Larcombe (iii)

–

Joseph Papa

–

Ajay Piramal (iv)

–

Roberto Quarta (v)

–

Richard De Schutter

(i) Appointed to the Board on 4 February 2013.

(ii) Appointed to the Board on 11 April 2013.

(iii) Unable to attend one Remuneration Committee meeting due to an unforeseen commitment.

(iv) Unable to attend some meetings due to other commitments. To retire from the Board following the Annual General Meeting on 10 April 2014.

(v) Appointed to the Board on 4 December 2013.

COMPANY SECRETARY

Susan Swabey (52)

Susan was appointed Company Secretary in May 2009.

Susan has 30 years’ experience as a company secretary in a wide range of companies including Prudential plc, Amersham plc and RMC Group plc. Her work has covered Board support, corporate governance, corporate transactions, share registration, listing obligations, corporate social responsibility, pensions, insurance and employee and executive share plans. Susan is a member of the GC100 Group Executive Committee and the CBI Companies Committee and is a frequent speaker on corporate governance related matters.

With effect from 1 March 2014, she will be a trustee of ShareGift, the share donation charity.

Nationality

British

Compliance statement

We are committed to the highest standards of corporate governance and comply with all the provisions of the UK Corporate Governance Code 2012 (the ‘Code’). The Company’s American Depositary Shares are listed on the NYSE and we are therefore subject to the rules of the NYSE as well as to the US securities laws and the rules of the SEC applicable to foreign private issuers. We comply with the requirements of the SEC and NYSE except that the Nomination & Governance Committee is not comprised wholly of Independent Directors, as required by the NYSE, but consists of a majority of Independent Directors in accordance with the Code. We shall explain in this corporate governance statement and the Reports of the Audit and Remuneration Committees, how we have applied the provisions and principles of the Financial Conduct Authority’s (‘FCA’) Listing Rules, Disclosure & Transparency Rules (‘DTR’) and the Code throughout the year.

Board

The Board is responsible for determining the strategy of the Company. The Chief Executive Officer and his Executive team implement that strategy. More detail about the structure of the Board, the matters we deal with and the key activities we undertook in 2013 is on pages 49 and 50.

Changes to Board composition

We are making a number of changes to the composition of our Board at the Annual General Meeting:

–	Sir John Buchanan will be retiring from the Board, having joined the Board in 2005 and assumed the role of Chairman in April 2006

–	Roberto Quarta, who joined the Board as Non-executive Director and Chairman Elect on 4 December 2013, will become Chairman, assuming that he is elected as a Director by shareholders at the meeting

–	Richard De Schutter will retire from the Board. Richard has served on the Board since January 2001 as a Non-executive Director and a member of a number of the Board Committees. He has been the Senior Independent Director since April 2011

–	Brian Larcombe will take over as Senior Independent Director to assist a smooth transition between Chairmen

–	Ajay Piramal will retire from the Board. He has served on the Board since January 2012.

Roles of Directors

Whilst we all share collective responsibility for the activities of the Board, some of our roles have been defined in greater detail. In particular, the roles and responsibilities of the Chairman and Chief Executive Officer are clearly defined.

Chairman

– Building a well balanced Board

– Chairing Board meetings and setting Board agendas

– Ensuring effectiveness of the Board and ensuring annual review undertaken

– Encouraging constructive challenge and facilitating effective communication between the Board members

– Promoting effective Board relationships

– Ensuring appropriate induction and development programmes

– Ensuring effective two way communication and debate with Shareholders

– Setting the tone at the top with regard to compliance and sustainability matters

– Promoting high standards of corporate governance

– Maintaining appropriate balance between stakeholders.

Chief Executive Officer

– Developing and implementing Group strategy

– Recommending the annual budget and five-year strategic and financial plan

– Ensuring coherent leadership of the Group

– Managing the Group’s risk profile and establishing effective internal controls

– Regularly reviewing organisational structure, developing executive team and planning for succession

– Ensuring the Chairman and Board are kept advised and updated regarding key matters

– Maintaining relationships with shareholders and advising the Board accordingly

– Setting the tone at the top with regard to compliance and sustainability matters.

The Non-executive Directors meet regularly prior to each Board meeting without management in attendance. The roles of Non-executive Directors and, in particular, the Senior Independent Director are defined as follows:

Non-executive Directors

– Providing effective challenge to management

– Assisting in development of strategy

– Serving on the Board Committees.

Senior Independent Director

– Chairing meetings in the absence of the Chairman

– Acting as a sounding board for the Chairman on Board-related matters

– Acting as an intermediary for the other Directors where necessary

– Available to Shareholders on matters which cannot otherwise be resolved

– Leading annual evaluation into the Board’s effectiveness

– Leading search for a new Chairman, as necessary.

Independence of Non-executive Directors

We require our Non-executive Directors to remain independent from management so that they are able to exercise independent oversight and effectively challenge management. We therefore continually assess the independence of each of our Non-executive Directors. The Executive Directors have determined that all our Non-executive Directors are independent in accordance with both UK and US requirements. None of our Non-executive Directors or their immediate families has ever had a material relationship with the Group. None of them receives additional remuneration apart from Directors’ fees, nor do they participate in the Group’s share plans or pension schemes. None of them serve as directors of any companies or affiliates in which any other Director is a director.

However, more importantly, each of our Non-executive Directors is prepared to question and challenge management, to request more information and to ask the difficult question. They insist on robust responses both within the Board room and sometimes between Board meetings. The Chief Executive Officer is open to challenge from the Non-executive Directors and uses this positively to provide more detail and to reflect further on issues.

Corporate Governance Statement continued

As explained, Richard De Schutter will retire from the Board following the Annual General Meeting. Brian Larcombe, who has served for 12 years, will remain on the Board as Senior Independent Director to ensure a smooth transition between chairmen. Pamela Kirby who has served for 12 years will remain on the Board as Chairman of the Ethics & Compliance Committee and member of the Remuneration Committee. The Board believes that the skills, diversity and experience Brian and Pamela bring to the Board with their in-depth knowledge of the Company are important for continuity in this time of transition.

We are mindful that some of our Non-executive Directors have served on the Board for a period of time that some might regard as likely to impact their independence. We do not believe this to be the case, but have reviewed the length of service of our Non-executive Board members and have taken this into consideration, when making the changes to the Board composition outlined above.

We continue to search for other suitable Non-executive Directors, whose experience will align with our strategic objectives and, in due course, our longer serving directors will step down.

Board Membership

– Non-executive Chairman Sir John Buchanan (to retire on 10 April 2014)

– Chief Executive Officer Olivier Bohuon

– Chief Financial Officer Julie Brown (appointed 4 February 2013).

Nine Independent Non-executive Directors

– Richard De Schutter (Senior Independent Director) (to retire on 10 April 2014)

– Ian Barlow

– Baroness Virginia Bottomley

– Michael Friedman (appointed 11 April 2013)

– Pamela Kirby

– Brian Larcombe (to become Senior Independent Director on 10 April 2014)

– Joseph Papa

– Ajay Piramal (to retire on 10 April 2014)

– Roberto Quarta (appointed on 4 December 2013. Independent on appointment) (to become Chairman on 10 April 2014).

Role of the Board

Strategy

– Approving the Group strategy including major changes to corporate and management structure, acquisitions, mergers, disposals, capital transactions over $10m, annual budget, financial plan, business plan, major borrowings and finance and banking arrangements

– Approving changes to the size and structure of the Board, overseeing succession planning and the appointment and removal of Directors and the Company Secretary

– Approving Group policies relating to corporate social responsibility, health and safety, Code of Conduct and Code of Share Dealing and other matters.

Performance

– Reviewing performance against strategy, budgets and financial and business plans

– Overseeing Group operations and maintaining a sound system of internal control

– Determining dividend policy and dividend recommendations

– Approving the appointment and removal of the Auditor and other professional advisers and approving significant changes to accounting policies or practices

– Approving the use of the Company’s shares in relation to employee and executive incentive plans.

Risk

– Determining risk appetite, regularly reviewing risk register and risk management processes (see pages 38–41 for more detail).

Shareholder Communications

– Approving preliminary announcement of annual results, annual report, half yearly report, quarterly financial announcements, the release of price sensitive announcements and any listing particulars, circulars or prospectuses

– Maintaining relationships and continued engagement with Shareholders.

Key activities in 2013

(in addition to regular annual activities)

– Review and oversight of the implementation of the strategy and organisational structure

– Oversight of risk management process and review of strategic risk

– Approval of five-year plan

– Review of Board effectiveness

– Continued review of Board composition and appointment of Michael Friedman and Roberto Quarta to the Board

– Consideration and approval of the acquisitions of Sushrut-Adler in India, Plato Grup in Turkey and Politec Saude and Pro Cirurgia Especializada in Brazil

– Approval and oversight of European Process Optimisation programme

– Six physical scheduled meetings and two scheduled telephone meetings

– Four day strategy review and visit to our Tokyo headquarters

– Two day visit to our US operations in Andover, Massachusetts

– Considered and approved the Capital Allocation Framework

– Considered and reviewed succession planning both at Board level and below

– Approved the sustainability policy and report.

Board Development Programme

Our Board Development Programme is directed to the specific needs and interests of our Directors. We focus the development sessions on facilitating a greater awareness and understanding of our business rather than formal training in what it is to be a Director. We value our visits to the different Smith & Nephew sites around the world, where we meet with the local managers of our businesses and see the daily operations in action. Meeting our local managers helps us to understand the challenges they face and their plans to meet those challenges. We also take the opportunity to look at our products and in particular the new products being developed by our R&D teams. This direct contact with the business in the locations we operate around the world really helps us to make investment and strategic decisions. Meeting our local managers helps us when making succession planning decisions below Board level.

During the course of the year, we receive updates at the Board and Committee meetings on external corporate governance changes likely to impact the Company in the future. In 2013, we particularly focused on changes to Narrative Reporting and Reporting on Remuneration. We also looked into the implications of cyber security on the business.

New Directors receive tailored induction programmes, when they join the Board. In 2013, Michael Friedman attended a briefing on UK company law and corporate governance practices. He also attended a series of one-to-one meetings with senior members of management at our head office. Roberto Quarta has commenced his induction programme, meeting the leaders of key divisions and functions and visiting our key site in Hull. All Non-executive Directors are encouraged to visit our overseas businesses, if they happen to be travelling for other purposes. In 2013, visits of this nature were made to operations in the US, Singapore and India. Our local management teams enjoy welcoming Non-executive Directors to their business and it emphasises the interest the Board takes in all our operations.

The following development sessions were run during 2013:


Month		Activity
April		Presentation from Roger Teasdale, President, Advanced Wound Management on the Advanced Wound Management business and progress of the integration of the Biotherapeutics business.
July		Audit Committee Development Session (open to all the Board) covering developments in the accounting and reporting landscape including narrative reporting, the Financial Reporting Council changes to Audit Committee and Auditor reporting, cyber security and other UK and European developments.
September		Visit to our Tokyo offices with a presentation from senior Japanese management on the local business and challenges faced. Presentations from the entire Executive team as part of the Board’s Strategy Review. Board discussion on Risk as part of the Board’s Strategy discussions.
October		Visit to Advanced Surgical Devices facility in Andover, Massachusetts. Series of presentations from our Advanced Surgical Devices senior executives on the challenges faced by the business, our strategy and initiatives to meet these challenges and an update on progress made since the previous year.
December		Workshop on cyber security.

Board Effectiveness Review

We conduct an annual review into the effectiveness of the Board. In 2012, the review was facilitated externally and drew positive conclusions. In 2013 therefore, we undertook an internal review, which was led by Richard De Schutter, the Senior Independent Director.

The review in 2013 consisted of a questionnaire followed by a series of interviews with the Directors towards the end of the year. The questionnaire was based on the internal questionnaire used in 2011 enabling a comparison to be made between the two years. The interviews with the Directors were broadly based on the questionnaire but also covered any other matters the Directors wished to raise.

Mr De Schutter presented the results of his findings to the Board in early February 2014. Overall, the review concluded that the performance of the Board had improved since the previous internal review particularly in evaluating performance against the long-term strategic plan, identifying and monitoring strategic risks and gaining a better understanding of the competitive environment. Non-executive Directors also valued the meetings they held without management present, ahead of each Board and some Committee meetings as well as the opportunity to meet senior executives below Board level on site visits and at Board presentations.

The review identified the following areas that would require attention in 2014:

Areas for Attention

The Board was currently in transition with the retirement of Sir John Buchanan as Chairman, Richard De Schutter as Senior Independent Director and Ajay Piramal as Non-executive Director following the Annual General Meeting. It was therefore recognised that Succession Planning at Non-executive Director level would be a key priority for the new Chairman, Roberto Quarta, after the Annual General Meeting.

It was felt that the number, timing and length of the Board and Committee meetings could be reviewed to consider whether the current pattern of meetings was most effective.

It is expected that the review in 2014 will be facilitated externally.

Company Secretary and independent advice

The Company Secretary, Susan Swabey, is responsible to the Board for ensuring that we comply with all corporate governance requirements and are kept updated on our responsibilities. We all have access to her, individually and collectively.

We may also, from time to time, obtain independent professional advice, at the Company’s expense, if we judge it necessary in order to fulfil our responsibilities as Directors. If we are unable to attend a Board meeting or Board Committee meeting, we ensure that we are familiar with the matters to be discussed and make our views known to the Chairman or the Chairman of the relevant Committee prior to the meeting.

Management of conflicts of interest

None of us, nor our connected persons, has any family relationship with any other Director or officer, nor has a material interest in any contract to which the Company or any of its subsidiaries are, or were, a party during the year or up to 24 February 2014.

Each of us has a duty under the Companies Act 2006 to avoid a situation in which we have or may have a direct or indirect interest that conflicts or might conflict with the interests of the Company. This duty is in addition to the existing duty that we owe to the Company to disclose to the Board any transaction or arrangement under consideration by the Company. If we become aware of any situation which may give rise to a conflict of interest, we inform the rest of the Board immediately and the Board is then permitted under the Articles of Association to authorise such conflict. The information is recorded in the Company’s Register of Conflicts together with the date on which authorisation was given. In addition, we certify, on an annual basis, that the information contained in the Register is correct.

When the Board decides whether or not to authorise a conflict, only the Directors who have no interest in the matter are able to participate in the discussion and a conflict is only authorised if we believe that it would not have an impact on our ability to promote the Company’s success in the long term. Additionally, we may, as a Board, determine that certain limits or conditions must be imposed when giving authorisation. We have identified no actual conflicts which have required approval by the Board. We have, however, identified six situations which could potentially give rise to a conflict and these have been duly authorised by the Board and are reviewed on an annual basis.

Re-appointment of Directors

In accordance with the Code, all Directors, offer themselves to Shareholders for re-election annually, except those who are retiring following the Annual General Meeting. Roberto Quarta who was appointed to the Board on 4 December 2013 will offer himself for election. Each Director may be removed at any time by the Board or the Shareholders.

Directors’ Indemnity Arrangements

Each Director is covered by appropriate directors’ and officers’ liability insurance and there are also Deeds of Indemnity in place between the Company and each Director. These Deeds of Indemnity mean that the Company indemnifies Directors in respect of any proceedings brought by third parties against them personally in their capacity as Directors of the Company. The Company would also fund ongoing costs in defending a legal action as they are incurred rather than after judgement has been given. In the event of an unsuccessful defence in an action against them, individual Directors would be liable to repay the Company for any damages and to repay defence costs to the extent funded by the Company.

Liaison with Shareholders

The Executive Directors meet regularly with investors to discuss the Company’s business and financial performance both at the time of the announcement of results and at industry investor events. During 2013, the Executive Directors held meetings with institutional investors, including investors representing approximately 43% of the share capital as at 31 December 2013.

As part of this programme of investor meetings, during 2013, as Chairman of the Company, I met with investors representing 16% of the share capital. Over the last three years, I have met investors representing in aggregate 21% of the share capital. Also during 2013, Joseph Papa met with Shareholders holding 20% of the share capital to discuss remuneration policies and plans. In addition, we contacted a further three Shareholders representing 8% of the share capital summarising the discussions held with the Shareholders we had met.

We receive a short report at every Board meeting reviewing our major Shareholders and any significant changes in their holdings since the previous meeting. Olivier Bohuon and Julie Brown routinely advise us of any concerns or issues that Shareholders have raised with them in their meetings. We also receive copies of analysts’ reports on the Company and our peers between Board meetings.

The Company’s website (www.smith-nephew.com) contains information of interest to both institutional investors and private Shareholders, including financial information and webcasts of the results presentations to analysts for each quarter, as well as specific information for private Shareholders relating to the management of their shareholding.

Share capital

As at 24 February 2014, the Company’s total issued share capital with voting rights consisted of 893,814,245 ordinary shares of 20.0 US cents each. 25,122,968 ordinary shares are held in treasury and are not included in the above figure. Further information on treasury shares can be found in Note 19 of the Notes to the Group accounts.

As at 24 February 2014, notification had been received from the undernoted investors under the DTR in respect of interests in 3% or more of the issued ordinary shares with voting rights of the Company.

In addition to the above the Company is aware that Walter Scott & Partners Limited hold approximately 37.7 million ordinary shares (4.2%). Otherwise, the Company is not aware of any person who has a significant direct or indirect holding of securities in the Company and is not aware of any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of the Company.

Dividend

The Board has proposed a final dividend of 17.0 US cents per ordinary share which, together with the interim dividend of 10.40 US cents, makes a total for 2013 of 27.40 US cents. The final dividend is expected to be paid, subject to Shareholder approval, on 7 May 2014 to Shareholders on the Register of Members at the close of business on 22 April 2014.

Annual General Meeting

The Company’s Annual General Meeting is to be held on 10 April 2014 at 2:00 pm at No.11 Cavendish Square, London W1G 0AN. Registered Shareholders have been sent either a Notice of Annual General Meeting or notification of availability of the Notice of Annual General Meeting.

Code of Ethics for Senior Financial Officers

We have adopted a Code of Ethics for Senior Financial Officers, which is available free of charge on the Group’s website (www.smith-nephew.com) and on request. This applies to the Chief Executive Officer, Chief Financial Officer, Vice President, Group Finance and the Group’s senior financial officers. There have been no waivers to any of the Code’s provisions nor any amendments made to the Code during 2013 or up until 24 February 2014.

Internal controls

Evaluation of Internal Controls Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

There is an established system of internal control throughout the Group and our Divisions. The main elements of the internal control framework are as follows:

The management of each Division is responsible for the establishment and review of effective internal financial controls within their Division.

The Group Finance Manual sets out, amongst other things, financial and accounting policies and minimum internal financial control standards.

The Internal Audit function agrees an annual work plan and scope of work with the Audit Committee.

The Audit Committee reviewed reports from Internal Audit on their findings on internal financial controls.

The Audit Committee reviews the Group Whistle-blower procedures.

The Audit Committee reviews regular reports from the Vice President, Group Finance and the Heads of the Taxation and Treasury functions.

This system of internal control has been designed to manage rather than eliminate material risks to the achievement of our strategic and business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. Because of inherent limitations, our internal controls over financial reporting may not prevent or detect all misstatements. In addition, our projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This process complies with the Financial Reporting Council’s ‘Internal Control: Revised Guidance for Directors on the Combined Code’ and additionally contributes to our compliance with the obligations under the Sarbanes-Oxley Act 2002 and other internal assurance activities. There has been no change in the Group’s internal control over financial reporting during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the Group’s internal control over financial reporting.

We, as a Board, are responsible overall for reviewing and approving the adequacy and effectiveness of the risk management framework and the system of internal controls over financial, operational (including quality management) and ethical compliance processes operated by the Group. We have delegated responsibility for this review to the Audit Committee. The Audit Committee, through the Internal Audit function reviews the adequacy and effectiveness of internal control procedures and identifies any weaknesses and ensures these are remediated within agreed timelines. The latest review covered the financial year to 31 December 2013 and included the period up to the approval of this Annual Report. The main elements of this annual review are as follows:

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Group’s disclosure controls and procedures as at 31 December 2013. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded on 24 February 2014 that the disclosure controls and procedures were effective as at 31 December 2013.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Group’s internal control over financial reporting as at 31 December 2013 in accordance with the requirements in the US under s404 of the Sarbanes-Oxley Act. In making this assessment, they used the criteria set forth by the Committee of Sponsoring Organisations of the Treadway Commission in Internal Control-Integrated Framework. Based on their assessment, management concluded and reported that, as at 31 December 2013, the Group’s internal control over financial reporting is effective based on those criteria.

Having received the report from management, the Audit Committee reports to the Board on the effectiveness of controls.

Ernst & Young LLP, an independent registered public accounting firm issued an audit report on the Group’s internal control over financial reporting as at 31 December 2013. This report appears on page 91.

The Auditor

Ernst & Young LLP have expressed their willingness to continue as the Auditor. Resolutions proposing their re-appointment for 2014 and to authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting, as approved by the Audit Committee.

We shall be tendering the provision of Audit services for future years during 2014. Further details are included in the Audit Committee Report.

Disclosure of information to the Auditor

In accordance with Section 418 of the Companies Act 2006, the Directors serving at the time of approving the Directors’ Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of which the Auditor, Ernst & Young LLP, are unaware and the Directors also confirm that they have taken reasonable steps to be aware of any relevant audit information and, accordingly, to establish that the Auditor is aware of such information.

Principal accountant fees and services

Fees for professional services provided by Ernst & Young LLP, the Group’s independent auditor in each of the last two fiscal years, in each of the following categories were:


	2013 $ million		2012 $ million
Audit		3	3

Audit related fees		–	–

Tax		3	2

Other		–	–
		6	5

Audit fees include fees associated with the annual audit and local statutory audits required internationally. A more detailed breakdown of audit fees may be found in Note 3.2 of the Notes to the Group accounts.

Corporate headquarters and registered office

The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam Street, London WC2N 6LA, UK. Registered in England and Wales No. 324357. Tel: +44 (0)20 7401 7646. Website: www.smith-nephew.com

Committees of the Board

We delegate some of the Board’s detailed work to each of the Nomination & Governance, Ethics & Compliance, Audit and Remuneration Committees. Each of these has their own Terms of Reference, which may be found on the Group’s website at www.smith-nephew.com. The Company Secretary or her designate is secretary to each of the Committees. The Chairman of each Committee reports orally to the Board and minutes of the meetings are circulated to all members of the Board.

Other Committees

Executive Risk Committee

Olivier Bohuon chairs our Executive Risk Committee which includes the Executive Directors and Executive Officers of the Group. As an integral part of our planning and review process, the management of each of our divisions identifies the risks applicable to their business, the probability of those risks occurring, the impact if they do occur and the actions required and being taken to manage and mitigate those risks. The Executive Risk Committee meets twice a year to review the major risks they identify across the Group and the mitigation processes and plans. As appropriate, the Executive Risk Committee may re-categorise risks or require further information or mitigating action to be undertaken. We receive an annual report from the Executive Risk Committee, which details the significant risks categorised by potential financial impact on profit and share price and by likelihood of occurrence. Details of new, key or significantly increased risks, along with actions put in place to mitigate such risks, are also reported to us as appropriate. We have provided further information on the principal risks identified through this process in ‘Financial review and principal risks’ on pages 36 to 41 of this Annual Report.

Disclosures Committee

Olivier Bohuon chairs the Disclosures Committee which includes the Chief Financial Officer and various additional senior executives. The Committee meets as required and approves the release of all major communications to investors, to the UK Listing Authority, SEC and to the London and New York Stock Exchanges.

By order of the Board, on 26 February 2014

LOGO

Sir John Buchanan

Chairman

Nomination & Governance Committee


Sir John Buchanan

Membership

–	Sir John Buchanan (Chairman) (Independent on appointment)

–	Olivier Bohuon

–	Brian Larcombe (Independent)

–	Richard De Schutter (Independent)

–	Roberto Quarta (Independent) (Chairman Elect) with effect from 4 December 2013.

Five meetings

Main responsibilities

–	Review size and composition of the Board

–	Oversee the Board succession plans

–	Recommend Director appointments

–	Oversee governance aspects of the Board and its Committees

–	Oversee review into the Board’s effectiveness

–	Consider and update the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Committees

–	Monitor external corporate governance activities and keep the Board updated

–	Oversee the Board Development Programme and the induction process for new Directors.

Key activities in 2013

(in addition to main responsibilities)

–	Recommended the appointment of Roberto Quarta as Chairman Elect

–	Recommended the appointment of Michael Friedman as a new Non-executive Director

–	Reviewed and approved new Terms of Reference for Board Committees and new Matters Reserved to the Board

–	Continued consideration of diversity issues, independence of Non-executive Directors and potential conflicts of interests

–	Received updates on corporate governance matters.

Dear Shareholder,

I am pleased to present my report on the activities of the Nomination & Governance Committee in 2013. The membership and principal duties of the Committee are set out in the table above. In 2013, we dealt with the following matters:

Appointment of Roberto Quarta as Chairman Elect

In April 2014, I shall have served on the Smith & Nephew plc Board for nine years. The Board agreed therefore that they should commence a search for my replacement during 2013. Richard De Schutter, Senior Independent Director led this search assisted by Brian Larcombe, member of this Committee and by the independent search firm, Russell Reynolds. They interviewed a number of candidates, who also met with Olivier Bohuon, the Chief Executive Officer and other Non-executive Directors. I did not take part in this search, but was kept updated of progress throughout. In October, the Committee recommended the

appointment of Roberto Quarta as Non-executive Director and Chairman Elect with effect from 4 December 2013. I shall retire from the Board following the Annual General Meeting and Roberto Quarta will be appointed in my place.

Changes to Board Composition

The Committee recommended the appointment of Michael Friedman as Non-executive Director. He joined the Board on 11 April 2013 bringing exceptional experience of the US Healthcare market with both public and private sector experience.

The Committee reviewed the composition of the Board and recommended that Brian Larcombe replace Richard De Schutter as Senior Independent Director, when he retires following the Annual General Meeting.

The Committee has continued its search for additional Non-executive Directors, focusing, in particular, on the skills, experience, independence and diversity each candidate brings to the Board. We look for candidates who will support the strategic priorities identified by the Board and in 2014 will continue to look for Non-executive Directors with experience within emerging markets or within the US and European healthcare systems.

Our focus on emerging markets experience will be particularly important after the retirement of Ajay Piramel following the Annual General Meeting on 10 April 2014.

Governance Matters

During the year, the Committee also addressed a number of governance matters. We reviewed the Terms of Reference of all the Board Committees in light of new regulations and guidance from the UK Government and the Financial Reporting Council on Executive Remuneration, Narrative Reporting and Audit Committee Reporting. We received updates from the Company Secretary on new developments in corporate reporting in both the UK and Europe. We reviewed the independence of our Non-executive Directors, considered potential conflicts of interest and the diversity of the Board and made recommendations concerning these matters to the Board.

Diversity

As we explained in our 2011 Annual Report, we value diversity in the Boardroom. Our directors come from different backgrounds and each brings unique capabilities and perspectives to our discussions with a wide range of professional and geographical backgrounds. We are committed to maintaining a diverse Board. In 2012, we stated that our expectation would be that by 2015,25% of our Board would be female and we have met this expectation. When appointing new directors, we will continue to appoint on merit whilst valuing diversity in its broadest sense.

Whilst the whole Board remains responsible for ensuring that the Company is governed appropriately, the Committee carries out the more detailed work to support this.

Yours sincerely

LOGO

Sir John Buchanan

Chairman of Nomination & Governance Committee

Dear Shareholder,

I am pleased to present my report on the activities of the Ethics & Compliance Committee in 2013. The membership and the principal duties of the Committee are set out in the table. In 2013, we dealt with the following matters, among others:

Settlement with US Securities and Exchange

Commission and US Department of Justice

During the year, we continued to work closely with the independent monitor appointed as part of our settlement with the SEC and DOJ in 2012. With his help, we have continued to evaluate the effectiveness of our compliance programme and adopt further enhancements to the programme. We met individually with the monitor and collectively as a Committee and discussed our compliance programme with him. In August, the monitor submitted to the SEC, DOJ and our Board a follow-up report to his initial report from 2012. The follow-up report contained additional recommendations and observations regarding implementation of his initial recommendations. It also concluded that Smith & Nephew’s programme is reasonably designed and implemented to detect and prevent violations of the anti-corruption laws and is functioning effectively. The SEC and DOJ concurred in that assessment, and in December 2013 we and the monitor submitted a final, joint report. In January 2014, the SEC and DOJ confirmed that the independent monitorship has terminated. We are now subject to self-reporting and other requirements for the remainder of the settlement agreements (that is, until at least March 2015).

Compliance Programme for Distributors

We continued to review our compliance programme with third party sellers (such as distributors and sales agents), particularly in higher risk markets. This programme includes due diligence, contracts with compliance terms and compliance training. To increase oversight, we are also piloting related monitoring and auditing programmes in 2014. During 2013, we required our distributors to complete expanded due diligence questionnaires and certifications and have continued to work with them to build and enhance their own compliance programmes. We provide all our distributors with a set of resources, which they can customise and brand for their own compliance programmes.

Compliance Programme for Other Third Parties

We have continued to strengthen our controls over other third parties engaged by us to provide services other than selling our products, such as customs, registration and travel agents. In 2014, we will increase our scrutiny on potential higher risk third parties. We have established a policy and process requiring that managers categorise third parties and take appropriate steps, including performing a risk assessment, conducting due diligence and assigning training, based on third party type and risk profile. We previously created Guidance on the Smith & Nephew Code of Conduct and Business Principles for Third Parties to highlight the areas of our Code of Conduct that apply directly to third parties and that we expect them to follow when working on our behalf.

Employee Compliance Programme

New employees are trained on our Code of Conduct which sets out the basic legal and ethical principles for carrying out business and applies both to the employees and others who act on the Group’s behalf. It sets out in detail how persons covered by the Code of Conduct are expected to interact ethically with healthcare professionals and government officials. It also covered the broader issues of ethics and compliance throughout the business and includes a code of business principles. A copy of the Code of Conduct can be found on the Group’s website (www.smith-nephew.com).

The Code of Conduct includes our whistle-blowing policy, which enables employees and members of the public to contact us anonymously through an independent provider (where allowed by local law). Individuals can also report a concern to their direct manager or a manager in Compliance, Legal or Human Resources. All calls and contacts are investigated and the appropriate action taken, including reports for senior management or the Board, where warranted. As stated in the Code of Conduct, we also enforce our non-retaliation policy against anyone who makes a report in good faith. The Ethics & Compliance Committee is advised of any potentially significant improprieties which are reported.

In 2013, we reviewed the Group Policies and Procedures (‘GPPs’) supporting the Code of Conduct, and made revisions to policies covering booths at medical meetings, free products, digital media and other areas. We continually work to enhance the employee compliance training programme. New employees receive training on our Code of Conduct, and we assign annual compliance training to employees. People managers also must complete a certification that includes content targeted to their role and the challenges they face. In 2013, we created a refresher course on Preventing Bribery and Corruption and a course on Effective Communication. The preventing bribery model gave employees an opportunity to apply their knowledge in different scenarios.

The annual bonus to senior managers can be negatively impacted if their team members have not completed the requisite training. The compliance training programme continues to evolve to focus more on tailored situations relevant to employees in specific job situations. Further support is provided through a comprehensive set of tools and resources located on our global intranet platform. These tools and resources are regularly reviewed and updated.

Compliance Infrastructure

We are mindful that an effective compliance programme requires both a culture of integrity and investment in the necessary infrastructure to give effect to that culture. As the Company grows in new markets, we continue to expand our global network of Regional Compliance Officers and they work with local management to reinforce the importance of compliance with our employees and third parties around the world. In 2013, we added regional compliance staff in Russia, Brazil, Turkey, Japan and the Middle East.


Ian Barlow

Dear Shareholder,

I am pleased to present the first Audit Committee Report prepared in accordance with the newly revised Corporate Governance Code, in which the role of the Audit Committee and its activities during the year are described in more detail than in previous years.

The role of the Audit Committee is to undertake an independent assessment of the financial affairs of the Company, to review the financial statements and to ensure that there is a sound system of financial control throughout the Group. Whilst the Board as a whole is responsible for approving the financial results, we undertake the detailed work to support that decision.

Composition of the Audit Committee

I am Chairman of the Audit Committee and Brian Larcombe, Richard De Schutter and Joseph Papa are members of the Committee. We are all independent Non-executive Directors and served on the Committee throughout 2013. Richard De Schutter will be retiring from the Board and the Audit Committee following the 2014 Annual General Meeting. The Board has determined that, as a Chartered Accountant and former Senior Partner, London at KPMG, I am the designated financial expert.

Role of the Audit Committee

Our work falls into the following five areas:

Financial reporting

– Reviewing significant financial reporting judgements and accounting policies and compliance with accounting standards

– Ensuring the integrity of the financial statements and their compliance with UK and US statutory requirements

– Ensuring the Annual Report and Accounts are fair, balanced and understandable and recommending their adoption by the Board

– Monitoring announcements relating to the Group’s financial performance.

Internal Controls and Risk Management

– Monitoring the effectiveness of internal controls and compliance with the UK Corporate Governance Code 2012 and the Sarbanes-Oxley Act, specifically sections 302 and 404

– Reviewing the operation of the Group’s risk management processes and the control environment over financial, regulatory and quality risks.

Fraud and Whistle-blowing

– Receiving reports on the processes in place to prevent fraud and to enable whistle-blowing

– If required, receiving reports of fraud incidents.

Internal Audit

– Agreeing internal audit plans and reviewing reports of internal audit work

– Monitoring the effectiveness of the internal audit function.

External Audit

– Overseeing the Board’s relationship with the external auditor

– Monitoring and reviewing the independence and performance of the external auditor and evaluating their effectiveness

– Making recommendations to the Board for the appointment or re-appointment of the external auditor.

The Terms of Reference of the Audit Committee describe our role and responsibilities more fully and can be found on our website at www.smith-nephew.com.

Activities of the Audit Committee in 2013 and since the year end

In 2013, we held five physical meetings and three meetings by telephone. Each meeting was attended by all members of the Committee. The Chief Executive Officer, Chief Financial Officer, Head of Internal Audit, the external auditor and key finance personnel also attended by invitation. We also met the external auditor without management present.

Our programme of work in 2013 is set out below and took the following format: As part of our review of the financial statements and the quarterly announcements, we reviewed management’s judgements applied in a number of areas including the valuation of inventories, liability provisioning, impairment, retirement benefit obligations, trade receivables, taxation and business combinations. The matters of judgement and our processes and conclusions are described in greater detail below.

During the year we received reports from the Group Treasurer, Head of Tax, Chief Information Officer (‘CIO’) and Chief Business Development Officer. All of these were focused on the risk management in these functions. The ClO’s report had a particular emphasis on cyber security. The Committee was satisfied that each function has evaluated the risks it is managing and has effective processes in place to mitigate and respond to those risks. We also had reports from the Heads of Quality Assurance and of Risk Assurance and had two dedicated discussions on the Group’s risk management during the year: first to review the Group’s risk management procedures and risk maps as a basis for sign off on the Annual Report and Accounts; the second in September as part of the Board’s annual strategy meeting to review the Board’s attitude to risk and assessment of the high level strategic risks.

In light of the changes in UK reporting regulations we continued to review the style, format and content of the Annual Report and Accounts paying particular attention to the changes in the Corporate Governance Code and reporting regulations. We also revised our Terms of Reference to take account of these changes.

Since the year end, we have reviewed the Annual Report and Accounts for 2013 and have concluded that taken as a whole they are fair, balanced and understandable and have advised the full Board accordingly. In coming to this conclusion, we have considered the description of the Group’s strategy and key risks, the key elements of the business model which is set out on page 7, and the key performance indicators and their link to the strategy.

Significant matters related to the financial statements

We considered the following key areas of judgement in relation to the 2013 accounts and at each reporting quarter end, which we discussed in all cases with management and the external auditor:

Area of judgement

Our action

Valuation of inventories

A feature of the Advanced Surgical Devices division’s business model (whose finished goods inventory makes up almost 80% of the Group total finished goods inventory) is the high level of product inventory required, some of which is located at customer premises and is available for customers’ immediate use. Complete sets of product, including large and small sizes, have to be made available in this way. These sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation.

At each quarter end we received reports from and discussed with management and the external auditor the level of provisioning and material areas at risk. Provisioning averaged 26% during the year (27% during 2012). We concluded that the proposed levels were appropriate.

Liability provisioning

The recognition of provisions for legal disputes is subject to a significant degree of estimation. Provision is made for loss contingencies when it is considered probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. In making its estimates, management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or if new facts come to light.

The level of provisioning for contingent and other liabilities is an issue where management and legal judgements are important.

As members of the Board, we receive regular updates from the Chief Legal Officer. These updates form the basis for the level of provisioning. These have not moved materially during the year and we determined that the proposed levels at year end of $86m in 2013 ($80m in 2012) were appropriate in the circumstances.

Impairment

In carrying out impairment reviews of goodwill, intangible assets and property, plant and equipment, a number of significant assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ or changes in expectations arise, impairment charges may be required which would adversely impact operating results.

We reviewed management’s reports on the key assumptions with respect to goodwill and investment in associates – particularly the forecast future cash flows and discount rates used to make these calculations. We have also considered the disclosure surrounding these reviews and concluded it was appropriate.

Retirement Benefits Obligations

A number of key judgements have to be made in calculating the fair value of the Group’s defined benefit pension plans. These assumptions affect the balance sheet liability, operating profit and other finance income/costs. The most critical assumptions are the discount rate and mortality assumptions to be applied to future pension plan liabilities. In making these judgements, management takes into account the advice of professional external actuaries and benchmarks its assumptions against external data.

We received quarterly reports from management setting out the movement in the key assumptions for the principal pension schemes in the Group and the financial impact of these movements. Any significant movement in the assumptions or movement in the underlying scheme assets and liabilities was discussed with management. Details of the assumptions used are set out in Note 18 of the Notes to the Group accounts. Following these discussions we concluded that the assumptions used were appropriate.

We formally reviewed the effectiveness of the external audit process and the quality of the audit. The review covered the following:

–	The audit partners with particular focus on the lead audit engagement partner;

–	The skills and experience of the audit team;

–	The planning and scope of the audit and identification of areas of audit risk;

–	The execution of the audit;

–	The role of management in the audit process;

–	The quality of communication between the external auditor and the audit committee;

–	The quality of their regular reports on accounting matters, governance and control;

–	The support provided by the external auditor to the audit committee;

–	The contribution made by the external auditor towards insights and added value;

–	The reputation and standing of the external auditor;

–	The independence and objectivity of the external auditor; and

–	The quality of the formal report to Shareholders.

We conducted this review as part of the 2013 year-end process. The views of each member of the Audit Committee, the Chief Financial Officer, the Vice President Group Finance and key members of the finance management team at Group and divisional level were sought. We considered the feedback from this process and shared it with the external auditor and with management.

During the year, we considered the inspection reports from the Audit Oversight Boards in the UK and US, specifically the:

–	Financial Reporting Council’s Audit Quality Inspections Annual Report 2012/13 and Public Report on the 2012 inspection of Ernst & Young LLP; and

–	The US based Public Company Accounting Oversight Board’s Report on the 2012 inspection of Ernst & Young LLP.

We also reviewed the fees of the external auditor which benchmarked well against groups of comparable size and complexity.

Our conclusions were that the external audit was carried out effectively, efficiently and with the necessary objectivity and independence.

Tender of External Audit Services

Ernst & Young or its predecessors have been our external auditor since we listed in 1937. We have regularly reviewed the provision of external audit services and because we have been satisfied with the quality and cost of the work undertaken by Ernst & Young, we have not considered it necessary to tender the appointment. We are however mindful of the recent changes introduced by the UK Corporate Governance Code 2012, the prospective new requirements of the Competition Commission to tender regularly, the imminent changes being progressed by the European Parliament for periodic mandatory rotation of auditors and the views of some of our Shareholders regarding the length of tenure of our external auditor. We recognise that now is the time to consider putting the external audit out to tender. We chose not to do this in 2013 given the very recent appointment of Julie Brown as Chief Financial Officer. We have however decided that following the Annual General Meeting in 2014, we will go out to tender in 2014 with a view to appointing a new external auditor, or re-appointing Ernst & Young as external auditor, for the year ending 31 December 2015.

As Chairman of the Audit Committee, I shall lead this process on behalf of the Board supported by Julie Brown and senior members of her financial management. When we have made a decision regarding the appointment of the external auditor, we shall make an appropriate announcement to the market.

Internal Audit

Our Internal Audit function reports directly to the Audit Committee and carries out work in three areas: our financial systems and processes; our systems that ensure compliance with our Code of Conduct, regulation and laws; and our quality managements systems in our manufacturing activities. In all three areas they act as a third line of defence behind operational management’s front line and our own assurance activities. During the year they completed 58 reviews, the results of which were reviewed by the Committee which also oversees the effective and timely remediation of any recommendations. The Committee receives a quarterly report detailing any un-remediated and overdue control recommendations.

We are keen to ensure that this vital function develops with the increasing scale and complexity of the business. With regards to new acquisitions specifically, the function will perform an audit on the Group’s Acquisition Due Diligence process followed by site specific audits on new acquisitions to ensure integration efforts are in line with approved plans. We will continue to monitor Internal Audit’s scope of work and operational methods to ensure it plays a full role in providing assurance of the Group’s identification and management of risk and its associated controls.

Risk Management and Internal Control

On behalf of the Board we reviewed the system of internal financial control and satisfied ourselves that we are meeting required standards both for the year ended 31 December 2013 and up to the date of approval of this Annual Report. No concerns were raised with us in 2013 about possible improprieties in matters of financial reporting or other matters.

In coming to this conclusion:

–	We received regular reports from the internal audit function on their findings from the reviews undertaken throughout the year both from an internal audit perspective and also with regard to compliance with the Sarbanes Oxley Act

–	We requested and reviewed a report mapping Group level risks and related control assurance

–

We requested various reports from management relating to specific risks identified through the risk management process including the progress of the European Process Optimisation project (integration of enterprise reporting systems in Europe) and the risks inherent in our programme of business acquisitions. In addition the Board conducted a workshop on cyber security.

Our Risk Management Framework is underpinned by Business and Functional risk registers that highlight the risks identified and the probability and impact of risk to the Group, as well as mitigation plans. The most significant of these risks are considered by the Group Risk Committee for inclusion on a Group Risk Register. The effectiveness of this Framework is reviewed annually by Internal Audit and our Committee.

Yours sincerely

LOGO

Ian Barlow

Chairman of the Audit Committee

We have prepared this Directors’ Remuneration Report (the ‘Report’) in accordance with The Enterprise and Regulatory Reform Act 2012-2013 (clauses 81-84) and The Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’). The Report also meets the relevant requirements of the Financial Conduct Authority (‘FCA’) Listing Rules.

As required by the regulations, the first part of the Report (pages 64 to 72) is the Directors’ Remuneration Policy Report (the ‘Policy Report’). The Policy Report will be put to Shareholders for approval as a binding vote at the Annual General Meeting on 10 April 2014. The policy report describes our remuneration policy as it relates to the Directors of the Company. Once the policy report has been approved by Shareholders, all payments we make to any Director of the Company will be in accordance with this remuneration policy. We intend that this remuneration policy will remain in place unchanged for at least the next three years and will next be put to Shareholder vote at the Annual General Meeting to be held in 2017. We will bring the policy report back to Shareholders earlier in the event that we make any material change to the remuneration policy or Shareholders do not approve the annual report on remuneration.

The second part of the Report (pages 73 to 85) is the annual report on remuneration (the ‘Implementation Report’). The Implementation Report will be put to Shareholders for approval as an advisory vote at the Annual General Meeting on 10 April 2014. The Implementation Report explains how the remuneration policy was implemented during 2013 and also how it is currently being implemented in 2014.

LOGO

in line with our strategy &

which are simple & clear

to understand


As a Remuneration Committee, our aim is to devise remuneration packages that drive a performance in line with our corporate strategy and which are simple and clear to understand both for our Shareholders and for those who participate in our plans. We aim to have a clear line of sight between the performance of the Company and how our Directors and senior executives are paid. We do this by setting the fixed elements of pay, notably base salary and benefits, in line with what our Executive Directors would be paid at another company of a comparable size, complexity and geographical spread. For the variable elements of pay, we select performance measures that are linked to one or more of our Strategic Priorities as detailed on page 10 of the Annual Report as follows:
Measures in our Variable Pay Plans		Link to Strategic Priorities
Financial measures in Annual Incentive Plans
Revenue, Trading profit, Cash		We need to generate cash in our Established Markets to be able to invest in Emerging & International Markets, innovation, organic growth and acquisitions in order to continue to grow in the future. Cash flow is therefore important and this in turn is derived from increased revenues and healthy trading profits.
Business objectives in Annual Incentive Plans
Re-investment		We need to release resources from the businesses through improved structures and efficiencies in order to re-invest in our higher growth areas, including emerging markets, innovation, organic growth and acquisitions.
Processes		We need to enhance our business processes in order to operate more effectively and efficiently and to improve our operating model.
People		We need to attract and retain the right people to achieve our strategy through improving our operating model, winning in Established Markets and growing in emerging markets.
Customer		Our mission is to deliver advanced medical technologies that help healthcare professionals, our customers, improve the quality of life of their patients.
Performance measures in our Performance Share Plan
Cash flow		Cash flow from our Established Markets is necessary in order to fund growth in emerging markets, innovation, organic growth and acquisitions.
Revenue in Emerging & International markets		Our long-term strategy depends on our ability to grow in Emerging & International Markets, to innovate for growth and to supplement organic growth through acquisitions. This depends on our ability to develop new products and to expand into new markets both geographically and by product.
TSR		If we execute our strategy successfully, this will lead to an increased return for our Shareholders.

The following pages set out our remuneration policy in greater detail and then explain how we implement that policy. We believe that outstanding performance by our executives should be rewarded by attractive remuneration packages. We do however have measures in place which ensure that plans do not pay out where performance has not met threshold performance and to recover any amounts paid out, where subsequent events show that payments should not have been made.

We have aimed to design a remuneration package that will encourage our Executive Directors to drive performance in line with our strategy, whilst minimising risk, which will in turn deliver a healthy return to our Shareholders. We very much hope that the new style report is clearer for our Shareholders and shows how we have linked the design of our remuneration plans to our strategy.

LOGO

Joseph Papa

Chairman of the Remuneration Committee

The following table and accompanying notes explain the different elements of remuneration we pay to our Executive Directors:



		Maximum levels of payment		Framework in which performance is assessed


		The base salary of the Executive Directors with effect from 1 April 2014 will be as follows: Olivier Bohuon €1,111,782 Julie Brown £514,000 The factors noted in the previous column will be taken into consideration when making increases to base salary and when appointing a new Director. In normal circumstances, base salary increases for Executive Directors will relate to the geographic market and peer group. In addition, the average increases for employees across the group will be taken into account. The Remuneration Committee retains the right to approve higher increases when there is a substantial change in the scope of the Executive Director’s role. A full explanation will be provided in the Implementation Report should higher increases be approved in exceptional cases.		Performance in the prior year is one of the factors taken into account and poor performance is likely to lead to a zero salary increase.

		Up to 30% of base salary.		The level of payment in lieu of a pension paid to Executive Directors is not dependent on performance.

		The policy is framed by the nature of the benefits that the Remuneration Committee is willing to provide to Executive Directors. The maximum amount payable will depend on the cost of providing such benefits to an employee in the location at which the Executive Director is based. Shareholders should note that the cost of providing comparable benefits in different jurisdictions may vary widely. As an indication, the cost of such benefits provided in 2013 was as follows: Olivier Bohuon €80,705 Julie Brown £14,400 The maximum amount payable in benefits to an Executive Director, in normal circumstances, will not be significantly more than amounts paid in 2013 (or equivalent in local currency). The Remuneration Committee retains the right to pay more than this should the cost of providing the same underlying benefits increase or in the event of a relocation. A full explanation will be provided in the Implementation Report should the cost of benefits provided be significantly higher.		The level and cost of benefits provided to Executive Directors is not dependent on performance but on the package of benefits provided to comparable roles within the relevant location.


		Executive Directors may currently invest up to £250 per month in the UK ShareSave Plan. The Remuneration Committee may exercise its discretion to increase this amount up to the maximum permitted by the HM Revenue & Customs. Similar limits will apply in different locations.		The potential gains from all-employee plans are not based on performance but are linked to growth in the share price.



		Maximum levels of payment		Framework in which performance is assessed


		The total maximum payable under the Annual Incentive Plan is 215% of base salary (150% Cash Incentive and 65% Equity Incentive). 50% salary awarded for threshold performance. 100% salary awarded for target performance. 150% salary awarded for maximum performance. Performance assessed against individual objectives and Group financial targets.		The cash and share awards are subject to malus and clawback as detailed in the notes following this table. 70% of the cash component is based on financial performance measures, which currently include revenue, trading profit and trading cash. The Remuneration Committee retains the discretion to adopt any financial performance measure that is relevant to the Company. 30% of the cash component is based on other business goals linked to the Company’s strategy, which could include financial and non-financial measures. The Remuneration Committee has the discretion to apply a multiplier, adjusting the outcome up or down by 10% to reward or penalise conduct in respect of leadership, corporate reputation, ethics, organisational behaviours and representing the Company both internally and externally. The maximum opportunity shown to the left cannot be exceeded through the application of the multiplier.

		0% of salary awarded for performance below target. 50% of salary awarded for target performance. 65% of salary awarded for maximum performance. Performance assessed against individual performance which includes an element of Group financial targets.		The Remuneration Committee will use their judgement of the individual’s performance in determining the level of equity award that may be awarded within the range of 50% to 65% of salary. The equity component will vest in three equal tranches over a three-year period, provided that the annual performance conditions set at the beginning of each year continue to be met.


		Annual awards: 47.5% of salary for threshold performance. 95% of salary for target performance. 190% of salary for maximum performance.		Currently: – 50% of the award vests on achievement of a three-year cumulative free cashflow target – 25% of the award vests subject to three-year Total Shareholder Return (‘TSR’) at median performance relative to industry peers – 25% of the award vests subject to the achievement of revenue targets in Emerging & International Markets – These measures are described in more detail in the notes and the targets and performance against them will be disclosed in the Implementation Report if appropriate – The Performance Share Award will vest on the third anniversary of the date of grant, depending on the extent to which the performance conditions are met over the three year period commencing in the year the award was made – The Remuneration Committee retains the discretion to change the measures and their respective weightings to ensure continuing alignment with the Company’s strategy – The cash and share awards are subject to malus and clawback as detailed in the notes following this table. Awards made prior to 2014 were subject to TSR and cash flow targets.

		Each award will be determined on a case-by-case basis. In normal circumstances such awards will be no more beneficial than the value of amounts forfeited by the Executive Director on leaving a previous company to join the Board.		The Remuneration Committee has the discretion to apply performance conditions to one-off awards if appropriate. However, if it is impossible to replicate the vesting conditions applicable to awards granted by other companies, awards may be made without performance conditions.

Notes to Future policy table – Executive Directors

Changes to remuneration policy

The remuneration policy described in the future policy table – Executive Directors is the same remuneration policy in respect of Executive Directors that has been in force since the beginning of 2012. It is anticipated that this policy will apply at least until the Annual General Meeting in 2017. The only change made has been to introduce a third performance measure to our Performance Share Programme.

Performance measures – Annual Incentive Plan

The performance measures which apply to the Annual Incentive Plan for Executive Directors comprise 70% financial measures and 30% business goals linked to the Company’s strategy, which could include financial and non-financial measures.

The financial measures may differ from year to year to provide continued alignment with the Company strategy. Measures to be used in 2014 are detailed in the Implementation Report. Each year the measures are chosen in order to relate to our Strategic Priorities and in turn to our key performance indicators, which are set out on pages 12 and 13. The performance targets are set by taking into account the strategy of the Company and are designed to be realistic yet stretching.

The business measures will differ from year to year as the evolving corporate strategy means that we will wish to set Executive Directors different business objectives in order to meet the current corporate needs. The business objectives are personal to each Executive Director, and are tailored to reflect their role and responsibilities during the year. These are set at the start of the year and reflect the most important areas of strategic focus for the Company. The Remuneration Committee sets annual measurement criteria (performance targets) that are appropriate to motivate and measure an Executive Director’s performance in any one year. The factors taken into consideration include the three-year strategic plan, prior years’ delivered performance and budgeted performance. In the past, measures have included R&D investment, succession planning, employee engagement, compliance, development of product portfolio, M&A activity and shared services implementation.

Performance measures –

Performance Share Programme

The performance measures which apply to the Performance Share Programme awards made in 2014 relate to cumulative free cash flow, revenue in Emerging & International Markets and Total Shareholder Return. We have chosen three measures which are relevant for the long-term success of the Company.

The free cash flow measure is important for us in a period of growth, when we need to generate cash to fund both organic and inorganic investment.

Revenue in Emerging & International Markets is important for us when we are seeking to generate profitable revenue in new markets and from new products.

The Total Shareholder Return measure, which compares our long-term performance against that of our peers, seeks to align the payout of the Performance Share Programme with the experience of our Shareholders. This helps Executive Directors relate to the Shareholder experience and ensure that vesting is aligned to the out-performance of our sector.

The Remuneration Committee will keep these performance measures under review and retains the discretion to alter the measures or their respective weightings to ensure continuing alignment to the corporate strategy.

Malus and clawback

The Remuneration Committee may determine that an unvested award or part of an award may not vest (regardless of whether or not the performance conditions have been met) or may determine that any cash bonus, vested shares, or their equivalent value in cash be returned to the Company in the event that any of the following matters is discovered:

–	A material misstatement of the Company’s financial results; or

–	A material error in determining the extent to which any performance condition has been satisfied; or

–	A significant adverse change in the financial performance of the Company, or a significant loss at a general level or at the division or function in which a participant worked; or

–	Inappropriate conduct (for example reputational issues), capability or performance by a participant, or within a team business area or profit centre.

These provisions apply to share awards under the Global Share Plan 2010 and cash amounts under the Annual Cash Incentive Plan.

Illustrations of the application of the remuneration policy

The following charts show the potential split between the different elements of the Executive Directors’ remuneration under three different performance scenarios:

LOGO

Data for the Chief Executive Officer assumes an exchange rate of €1 = £0.8494.

Policy on recruitment arrangements

Our policy on the recruitment of Executive Directors is to pay a fair remuneration package for the role being undertaken and the experience of the Executive Director appointed. In terms of base salary, we will seek to pay a salary comparable, in the opinion of the Committee, to that which would be paid for an equivalent position elsewhere. The Remuneration Committee will determine a base salary in line with the policy and having regard to the parameters set out on pages 64 and 65. Incoming Executive Directors will be entitled to pension, benefit and incentive arrangements which are the same as provided to existing Executive Directors. On that basis, awards would not exceed 405% of base salary.

We recognise that in the event that we require a new Executive Director to relocate to take up a position with the Company, we will also pay relocation and related costs as described in the Future policy table on pages 64 and 65, which is in line with the relocation arrangements we operate across the Group.

We also recognise that in many cases, an external appointee may forfeit sizeable cash bonuses and share awards if they choose to leave their former employer and join us. The Remuneration Committee therefore believes that we need the ability to compensate new hires for incentive awards they give up on joining us. The Committee will use its discretion in setting any such compensation, which will be decided on a case-by-case basis. We will only provide compensation which is no more beneficial than that given up by the new appointee and we will seek evidence from the previous employer to confirm the full details of bonus or share awards being forfeited. As far as possible, we will seek to replicate forfeited share awards using Smith & Nephew incentive plans or through reliance on 9.4.2 in the Listing Rules, whilst at the same time aiming for simplicity.

If we appoint an existing employee as an Executive Director of the Company, pre-exisiting obligations with respect to remuneration, such as pension, benefits and legacy share awards, will be honoured. Should these differ materially from current arrangements, these will be disclosed in the next Implementation Report.

We will supply details via an announcement to the London Stock Exchange of an incoming Executive Director’s remuneration arrangements at the time of their appointment.

Service contracts

We employ Executive Directors on rolling service contracts with notice periods of up to 12 months from the Company and six months from the Executive Director. On termination of the contract, we may require the Executive Director not to work their notice period and pay them an amount equivalent to the base salary and payment in lieu of pension and benefits they would have received if they had been required to work their notice period.

Under the terms of the Executive Director’s service contract, Executive Directors are restricted for a period of 12 months after leaving the employment of the Company from working for a competitor, soliciting orders from customers and offering employment to employees of Smith & Nephew. The Company retains the right to waive these provisions in certain circumstances. In the event that these provisions are waived and the former Executive Director commences employment earlier than at the end of the notice period, no further payments shall be made in respect of the portion of notice period not worked. Directors’ service contracts are available for inspection at the Company’s registered office: 15 Adam Street, London WC2N 6LA.

Policy on payment for loss of office

Our policy regarding termination payments to departing Executive Directors is to limit severance payments to pre-established contractual arrangements. In the event that the employment of an Executive Director is terminated, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the Executive Director, as well as the rules of any incentive plans.

Under normal circumstances (excluding termination for gross misconduct) all leavers are entitled to receive termination payments in lieu of notice equal to base salary, payment in lieu of pension, and benefits. In some circumstances additional benefits may become payable to cover reimbursement of untaken holiday leave, repatriation and outplacement fees, legal and financial advice.

In addition, we may also in exceptional circumstances exercise our discretion to pay the Executive Director a proportion of the annual cash incentive they would have received had they been required to work their notice period. Any entitlement or discretionary payment may be reduced in line with the Executive Director’s duty to mitigate losses, subject to applying our non-compete clause.

We will supply details via an announcement to the London Stock Exchange of a departing Executive Director’s termination arrangements at the time of departure.

In the case of a change of control which results in the termination of an Executive Director or a material alteration to their responsibilities or duties, within 12 months of the event, the Executive Director would be entitled to receive 12 months’ base salary plus payment in lieu of pension and benefits. In addition, the Remuneration Committee has discretion to pay an Executive Director in these circumstances an annual cash incentive. For Directors appointed prior to 1 November 2012, an automatic annual cash incentive is payable at target.

In the event that an Executive Director leaves for reasons of ill-health, death, redundancy or retirement in agreement with the Company, then the vesting of any outstanding annual cash incentive and equity incentive awards will generally depend on the Remuneration Committee’s assessment of performance to date. Performance share awards will be pro-rated for the time worked during the relevant performance period, and will remain subject to performance over the full performance period.

For all other leavers, the annual cash incentive will generally be forfeited and outstanding equity incentive awards and performance share awards will lapse.

One-off awards granted on appointment will normally lapse on leaving except in cases of death, retirement, redundancy, or ill-health. The Remuneration Committee has discretion to permit such awards to vest in other circumstances and will be subject to satisfactorily meeting performance conditions if applicable.

The Remuneration Committee retains discretion to alter these provisions on a case-by-case basis following a review of circumstances and to ensure fairness for both Shareholders and Executive Directors.

We will supply details via an announcement to the London Stock Exchange of an out-going Executive Director’s remuneration arrangements around the time of leaving.

Policy on shareholding requirements

The Remuneration Committee believes that one of the best ways our Executive Directors can have a greater alignment with Shareholders is for them to hold a significant number of shares in the Company. Executive Directors are therefore expected to build up a holding of Smith & Nephew shares worth two-times their base salary. In order to reinforce this expectation, we require them to retain 50% of all shares vesting under the Company share plans (after tax) until this holding has been met recognising that differing international tax regimes affect the pace at which an Executive Director may fulfil the shareholding requirement. When calculating whether or not this requirement has been met, we will include ordinary shares or ADRs held by the Executive Director and their immediate family and the intrinsic value of any vested but unexercised options.

Statement of consideration of employment conditions elsewhere in the Company and differences to the Executive Director Policy

All employees across the Group including the Executive Directors are incentivised in a similar manner. Although the salary levels and maximum opportunities under bonus and share plans differ, generally speaking the same targets and performance conditions relating to the Company’s strategy apply throughout the organisation.

Executive Director base salaries will generally increase at a rate in line with the average salary increases awarded across the Company. Given the diverse geographic markets within which the Company operates, the Committee will generally be informed by the average salary increase in both the market local to the Executive and the UK, recognising the Company’s place of listing, and will also consider market data periodically.

A range of different pension arrangements operate across the Group depending on location and/or length of service. Executive Directors and Executive Officers either participate in the legacy pension arrangements relevant to their local market or receive a cash payment of 30% of salary in lieu of a pension. Senior Executives who do not participate in a local Company pension plan receive a cash payment of 20% of salary in lieu of pension. Differing amounts apply for lower levels within the Company.

The Company has established a benefits framework under which the nature of benefits varies by geography. Executive Directors participate in benefit arrangements similar to those applied for employees within the applicable location.

All employees are set objectives at the beginning of each year, which link through to the objectives set for the Executive Directors. Annual cash incentives payable to employees across the Company depend on the satisfactory completion of these objectives as well as performance against relevant Group and divisional financial targets relating to revenue, trading profit and trading cash, similar to the financial targets set for the Executive Directors.

Executive Officers and Senior Executives (currently 72) participate in the annual Equity Incentive Programme and the Performance Share Programme. The maximum amounts payable are lower, but the performance conditions are the same as those that apply to the Executive Directors.

No specific consultation with employees has been undertaken relating to Director remuneration. However, regular employee surveys are conducted across the Group, which cover a wide range of issues relating to local employment conditions and an understanding of Group-wide strategic matters. Currently over 4,500 employees in 32 countries participate in one or more of our global share plans.

Future policy table

Chairman and Non-executive Directors

The following table and accompanying notes explain the different elements of remuneration we pay to our Chairman and Non-executive Directors. No element of their remuneration is subject to performance. All payments made to the Chairman are determined by the Remuneration Committee, whilst payments made to the Non-executive Directors are determined by the Directors who are not themselves Non-executive Directors, currently the Chairman, the Chief Executive Officer and the Chief Financial Officer.


How the component supports the short- and long-term strategy of the Company	How the component operates	Maximum levels of payment
Annual fees
Basic annual fee

To attract and retain Directors by setting fees at rates comparable to what would be paid in an equivalent position elsewhere. A proportion of the fees are paid in shares in the third quarter of each year in order to align Non-executive Directors’ fees with the interest of Shareholders.	Fees will be reviewed periodically. In future, any increase will be paid in shares until 25% of the total fee is paid in shares. Fees are set in line with market practice for fees paid by similarly sized UK listed companies. Annual fees are set and paid in UK sterling or US dollars depending on the location of the Non-executive Director. If appropriate, fees may be set and paid in alternative currencies.	Annual fees are currently as follows: £63,000 in cash plus £3,150 in shares; or $120,000 in cash plus $6,000 in shares. Chairman fee: £400,000 plus £20,000 in shares (to April 2014). £300,000 plus £100,000 in shares (from April 2014). Whilst it is not expected to increase the fees paid to the Non-executive Directors and the Chairman by more than the increases paid to employees generally, in exceptional circumstances, higher fees might become payable. The total maximum aggregate fees payable to the Non-executive Directors will not exceed £1.5m as set out in the Company’s articles of association.
Fee for Senior Independent Director and Committee Chairmen

To compensate Non-executive Directors for the additional time spent as Committee Chairmen or as the Senior Independent Director.	A fixed fee is paid, which is reviewed periodically.	£15,000 in cash; or $27,000 in cash. Whilst it is not expected that the fees paid to the Senior Independent Director or Committee Chairman will exceed the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.
Intercontinental travel fee

To compensate Non-executive Directors for the time spent travelling to attend meetings in another continent.	A fixed fee is paid, which is reviewed periodically.	£3,500 in cash; or $7,000 in cash. Whilst it is not expected to increase these fees by more than the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.

Letters of appointment

The Chairman and Non-executive Directors have letters of appointment which set out the terms under which they provide their services to the Company and are available for inspection at the Company’s registered office: 15 Adam Street, London WC2N 6LA. The appointment of Non-executive Directors is not subject to a notice period, nor is there any compensation payable on loss of office, for example, should they not be re-elected at an Annual General Meeting. The appointment of the Chairman is subject to a notice period of six months.

The Chairman and Non-executive Directors are required to acquire a shareholding in the Company equivalent in value to one times their basic fee within two years of their appointment to the Board.

Statement of consideration of Shareholder views

This policy report sets out the remuneration policy in relation to Executive Directors, which has been in place since 2012. As this policy evolved at the end of 2011 and during 2012, we engaged actively with Shareholders to explain our remuneration arrangements and to discuss their views on our proposals. At the time, Joseph Papa, the Chairman of the Remuneration Committee and members of the Senior Executive Team met with the holders of around 30% of our shares, including collectively with a number of smaller engaged investors, as well as Shareholder advisory bodies. We discussed the structure of our remuneration package, our policies on termination, recruitment, shareholding requirements and the operation of Annual Incentive Plan. The Directors’ remuneration report was approved by 96% of Shareholders who voted at the Annual General Meeting in 2013 and we received feedback from Shareholders around the time of this meeting that they understood and approved of our remuneration arrangements. Although the remuneration policy has remained essentially unchanged as in previous years, given the changes in remuneration reporting, we also conducted an engagement programme with our larger Shareholders in 2013. Joseph Papa met with the holders of around 20% of our shares, and with a number of Shareholder advisory bodies. He has also been available to discuss any aspect of our remuneration programme with Shareholders throughout the year. The Shareholders who have engaged with us have all been supportive of our approach to remuneration, recognising the link between the corporate strategy and executive reward.

The Implementation Report

The Remuneration Committee presents the Annual report on remuneration, (the ‘Implementation Report’), which together with the annual statement will be put to shareholders as an advisory vote at the Annual General Meeting to be held on 10 April 2014.

Remuneration Committee

The Chairman of the Remuneration Committee is Joseph Papa and the remaining members of the Remuneration Committee are Baroness Virginia Bottomley, Pamela Kirby, Brian Larcombe and Richard De Schutter, all of whom are independent Non-executive Directors and served throughout the year.

From time to time, other members of the Board attended meetings of the Remuneration Committee by invitation. In addition, the meetings are also attended by Susan Swabey, Company Secretary, Helen Maye, Chief Human Resources Officer and Bob Newcomb, SVP Global Rewards. Members of the Board and the Executive Team left any meeting at which their own remuneration was discussed.

During the year the Remuneration Committee met five times and agreed three matters by written resolution. Our main responsibilities are:

–	Determination of remuneration policy for Executive Directors and senior executives

–	Approval of individual remuneration packages for Executive Directors and Executive Officers at least annually and any major changes to individual packages throughout the year

–	Determination of the use of long-term incentive plans and oversee the use of shares in all executive and all-employee plans

–	Approval of appropriate performance measures for short-term and long-term incentive plans for Executive Directors and senior executives

–	Determination of pay-outs under short-term and long-term incentive plans for Executive Directors and senior executives

–	Approval of Directors’ Remuneration Report ensuring compliance with related governance provisions

–	Continuance of constructive engagement on remuneration issues with Shareholders

–	Consideration of remuneration policies and practices across the Group.

During the year, the Remuneration Committee received information and advice from Towers Watson, an independent executive remuneration consultancy firm appointed by the Remuneration Committee in 2011 following a full tender process. They provided advice on market trends and remuneration issues in general, attended Remuneration Committee meetings, assisted in the review of the Director’s Remuneration Report and in determining the third performance measure for the Performance Share Programme. The fees paid to Towers Watson for Remuneration Committee advice during 2013, charged on a time and expense basis, totalled £59,538. Towers Watson also provided other human resources and compensation advice to the Company for the level below the Board. Towers Watson comply with the Code of Conduct in relation to Executive Remuneration Consulting in the United Kingdom and the Remuneration Committee is satisfied that their advice is objective and independent.

Key activities of the Remuneration Committee in 2013 were:

–	Determination of remuneration packages and termination arrangement for certain Executive Officers

–	Development of revised reporting style on remuneration in line with the new reporting regulations

–	Reviewed Executive service contracts

–	Reviewed and revised the performance measures applying to our Performance Share Programme

–	Monitored the use of shares required for our employee share plans to ensure they remained within the dilution limits

–	Monitored adherence by executives to our shareholding guidelines

–	Approved the remuneration package for Roberto Quarta, our Chairman Elect

–	Reviewed and approved remuneration arrangements for various Executive Officers

–	Amended the terms of reference of the Remuneration Committee to reflect new reporting regulations

–	Met with key Shareholders to discuss remuneration matters.

The Implementation Report sets out both what we have paid our Directors in 2013 and what we intend to pay them in 2014.

Payment in lieu of pension: the value of the salary supplement paid by the Company in lieu of a pension.

Benefits: the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year. Prior years are restated to reflect amounts not known at the date of signing the previous annual report.

Annual Incentive Plan – cash: the value of the cash incentive payable for performance in respect of the relevant financial year.

Annual Incentive Plan – equity: the value of the equity element awarded in respect of performance in the relevant financial year, but subject to an ongoing performance test as described on pages 66 and 67 of this report.

Performance Share Plan: the value* of shares vesting that were subject to performance over the three-year period ending on 31 December in the relevant financial year.

Share Option Plan: the embedded gain* of options vesting that were subject to performance over the three-year period ending on 31 December in the relevant financial year.

All-Employee Share Plans: the gain on the date of grant for SAYE awards (these are only subject to an employment condition and therefore the total value is captured in the year of grant), reflecting the 20% discount at which options are granted in the relevant financial year.

One-off awards: the total face value of shares awarded to Julie Brown on appointment in 2013 as described on pages 66 and 67 of this report (these awards are only subject to an employment condition and therefore the total value is captured in the year of award).

The amounts have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.5632 and € to US$1.3278.

Base salary

With effect from 1 April in each year Executive Directors were paid the following base salaries:

In February 2014, we reviewed the base salaries of the Executive Directors, having considered general economic conditions and average salary increases across the rest of the Group, which have averaged at 2.8%. The Remuneration Committee has therefore agreed that the Executive Directors’ base salaries will increase by 2.8% with effect from 1 April 2014 to the following:


Olivier Bohuon		€1,111,782
Julie Brown		£514,000

Payment in lieu of pension

In 2013, both Olivier Bohuon and Julie Brown received a salary supplement of 30% of their basic salary to apply towards their retirement savings, in lieu of membership of one of the Company’s pension schemes. The same arrangement will apply in 2014.

Benefits

In 2013, both Olivier Bohuon and Julie Brown received death in service cover of seven times basic salary, of which four times salary is payable as a lump sum with the balance used to provide for any spouse and dependant persons. They also received health cover for themselves and their families and a car allowance. Olivier Bohuon also received financial consultancy advice and assistance with travel costs between London and Paris. The same arrangements will apply in 2014. The following table summarises the value of benefits on an element-by-element basis in respect of 2012 and 2013.

Olivier Bohuon

Adrian
Hennah

Julie Brown

2012

2013

2012

2013

Health cover

£16,870

£12,088(i)

£1,439

£1,130

Car and fuel allowance

€18,486

€18,050

£21,524

£13,270

Financial consultancy advice

£33,751

€25,577

–

Travel costs

£15,647

£19,407

N/A

N/A

Relocation costs

£226,893(ii)

£0

N/A

N/A

(i)	Olivier Bohuon is a member of our international healthcare plan.

(ii)	One-off relocation expense relating to relocating Olivier Bohuon from Paris to London. Prior years are restated to reflect amounts not known at the date of signing the previous annual report.

Annual Incentive Plan

During 2013, the Annual Incentive Plan for Executive Directors was based in the achievement of specific financial and business objectives as follows:


Financial objectives			70%
Revenue 30%
Trading profit 30%
Trading cash 10%
Business objectives			30%
R&D investment
Succession planning
Employee engagement
Compliance
Development of product portfolio (Olivier Bohuon only)
Shared services (Julie Brown only)

At the end of 2013, the Remuneration Committee conducted an assessment of each Executive Director against their financial and business objectives.

Over the period, revenue was $4,351m (ahead of target), trading profit was $987m (ahead of target) and trading cash flow $877m (between target and maximum).

The Board have considered whether it would be in the best interests of the Company and its Shareholders to disclose the precise targets agreed for each of the performance measures in 2013. The targets for each year are set within the context of the Group’s five-year plan, which is updated at least annually. If we were to disclose the precise targets for one year of the plan, this would give information to our competitors about our long-term plans, which they could use to compete against us, for example by re-timing the launch of new products or extension into new growth areas. This could be detrimental to our commercial performance both in 2014 and going forward. The Board has concluded that even though the actual results for 2013 are known and published, it would be commercially sensitive to disclose what the precise targets determined at the beginning of 2013 were.

The Remuneration Committee reviewed the performance of Olivier Bohuon and Julie Brown against their agreed business objectives for 2013. The Committee determined that Olivier Bohuon had an outstanding year. He led the Group strongly forward in both strategic and commercial terms, building and rebalancing the business through investments and acquisitions in areas of higher growth whilst delivering growth and Shareholder value. The Committee determined that Julie Brown also performed to a high standard in 2013. In her first year as Chief Financial Officer, Julie has strengthened the Group’s financial platform, processes and disciplines, introducing new frameworks and methodologies to support the sustained delivery of Smith & Nephew’s strategic priorities. It is not possible to disclose the precise personal targets set as a number of the measurements continue to apply into 2014 and would be commercially sensitive if known by our competitors. The Committee did highlight a number of their achievements as follows:

Directors’ remuneration report continued

Commentary on 2013 performance


Acquisitions and R&D investment
Olivier Bohuon		Julie Brown
Significantly increased investment in organic R&D and, through successful M&A, further strengthened the Group’s business and product pipeline. More closely aligned R&D to growth opportunities including meeting the needs of emerging market customers. Increased the rate of innovation to support sustainable growth and maximise long-term value to Shareholders.		Delivered Capital Allocation Framework that ensures highly disciplined use of cash; enabling focused investment in key areas and balance sheet efficiency. Supported the completion of three emerging market deals over the year. Return on investment assessments established for R&D and Capital investments to ensure resources are allocated to areas that generate the best return for business.
Succession planning
Olivier Bohuon		Julie Brown
Succession plans refreshed for all Executive Officers and top talent identified, developed and retained through significant personal engagement across the Company.		Strengthened finance management team through providing stretching development opportunities for key individuals and placement of top talent. Completed comprehensive Finance Talent Review and established succession plans for all key finance leadership positions.
Employee engagement
Olivier Bohuon		Julie Brown
Delivered demonstrable improvements from implementation of 2012 Employee Survey actions and initiated Great places to Work in initial tranche of 12 countries.		Increased business knowledge, cross-functional alignment, empowerment and personal development across the finance function, ensured employees embrace objectives in context of Group strategy and pursue stretching goals.
Compliance



FINANCIAL STATEMENTS AND OTHER INFORMATION
Directors’ responsibilities for the accounts*		88
Independent auditor’s US reports		91
Independent auditor’s UK report		92
Group accounts		94
Notes to the Group accounts		101
Independent auditor’s report for the Company		150
Company accounts		151
Notes to the Company accounts		152
Group information*		155
Other financial information*		159
Information for shareholders*		168


$4.4bn	$987m	$810m
Revenue¹ up 4%	Trading profit^{1, 2} up 5%	Operating profit¹ up 1%

76.9¢	61.7¢	27.4¢
Adjusted earnings per share² up 3%	Earnings per share down 23%	Dividends per share up 5%


TOTAL SEGMENT VALUE		TOTAL SEGMENT VALUE
ADVANCED SURGICAL DEVICES		ADVANCED WOUND MANAGEMENT
$23.2bn	+4%	$7.0bn	+4%


Advanced Wound Management
ADVANCED WOUND CARE
Products for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and post-operative wounds.
REVENUE¹
$843m			+1%
2012 $849m

ADVANCED WOUND DEVICES
Traditional and single-use Negative Pressure Wound Therapy (‘NPWT’) and hydrosurgery systems.
REVENUE¹
$213m			+20%
2012 $180m

ADVANCED WOUND BIOACTIVES
Bioactive technologies that provide unique approaches to debridement and dermal repair and regeneration.
REVENUE¹
$280m			+47%
2012 N/A


1 ESTABLISHED MARKETS

PERFORMANCE Our businesses in the Established Markets grew by 5% in the US and was flat in the Other Established Markets, where the macro-economic environment in Europe continues to be weak. By franchise, our performance relative to estimated global segment growth was slightly below in hip and knee reconstruction and trauma, around market in the higher growth joint repair segment of sports medicine and well above in advanced wound management. Hip and Knee Implant performance in 2013 was held back by our relatively high exposure to the weak European market, our position in the product cycle and metal-on-metal hip headwinds.		Our performance in the second half of 2013 was better than the first half, as a result of our investments in marketing, medical education and new products. For more detail on the market and competition see pages 16 to 18. GLOBAL OUTLOOK Established Markets for Smith & Nephew are the US, Europe, Japan, Australia, New Zealand and Canada. In these markets we expect the challenging economic conditions to continue, requiring realigned business models and focused investment, albeit that there are some signs of improvement in the US.

2 EMERGING & INTERNATIONAL MARKETS

PERFORMANCE The Emerging & International Markets grew at 18%, exceeding Established Markets rates and contributing half of annual revenue growth for the Group. These geographies now represent 13% of the Group’s overall revenue. During 2013: – Our success in China continued with growth of over 30% and now it is our 6th largest country by revenue – Significant investment to drive growth organically (e.g. Mexico and Saudi Arabia) and through acquisitions (Brazil, Turkey, India) – We put in place our strategy to address the mid-tier market.		GLOBAL OUTLOOK Emerging & International Markets represent those outside of the Established Markets including Brazil, China, India and Russia. The healthcare environment in these markets is rapidly expanding and with the right investments offers significant opportunities for the Group.


¨ U.S. GAAP		x International Financial Reporting Standards as issued by the International Accounting Standards Board		¨ Other



GROUP STRATEGIC REPORT*
Financial highlights		4
Chairman’s statement		5
Smith & Nephew today		6
Chief Executive Officer’s review of strategy		10
Strategic performance		12
Chief Financial Officer’s overview		14
Our marketplace		16
Our business		19
Segment performance
Advanced Surgical Devices		24
Advanced Wound Management		29
Sustainability		34
Financial review and principal risks		36



CORPORATE GOVERNANCE
Our Board of Directors*		44
Our Executive Officers*		46
Corporate Governance Statement*		48
Audit Committee Report*		58
Directors’ remuneration report		62


Group strategic report
Financial highlights		4
Chairman’s statement		5
Smith & Nephew today		6
Chief Executive Officer’s review of strategy		10
Strategic performance		12
Chief Financial Officer’s overview		14
Our marketplace		16
Our business		19
Segment performance
Advanced Surgical Devices		24
Advanced Wound Management		29
Sustainability		34
Financial review and principal risks		36

We are investing more in R&D to provide our customers with greater innovation


				With a business model
				that creates value

				OUR MISSION STATEMENT Delivering advanced medical technologies that help healthcare professionals, our customers, improve the quality of life for their patients OUR VALUES


		1 ESTABLISHED MARKETS
		Build upon existing strong positions, win market share through greater innovation and drive efficiencies to liberate resources.
		2 EMERGING & INTERNATIONAL MARKETS
		Deliver market leadership in the Emerging & International Markets by building strong, direct customer relationships and developing products specifically designed for these populations.
		3 INNOVATE FOR VALUE
		Accelerate our rate of innovation by investing more in research & development to support projects that will move clinical and cost boundaries and deliver maximum value.
		4 SIMPLIFY AND IMPROVE OUR OPERATING MODEL
		Pursue maximum efficiency in everything we do, streamline our operations and manufacturing, remove duplication and build strong global functions to support our commercial teams.
		5 SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS
		Build our platform by acquiring complementary technologies, manufacturing and distribution in the emerging markets and complementary products or businesses in our higher growth segments.


		3 INNOVATE FOR VALUE
		Natural-motion Journey II BCS Total Knee System
		JOURNEY II BCS sets a new standard in knee implant performance by restoring more normal motion. This is achieved through the reproduction of both the shapes of the joint’s hard surfaces and the normal force behaviour of the soft tissues, such as ligament and muscle firing patterns. As a result, the soft tissue’s re-adjustment to new shapes and forces after surgery is minimised, helping to return the patient’s stride to its natural rhythm. This latest innovation is the result of intense research and design, and the development of new PHYSIOLOGICAL MATCHING^à Technology. Using our LifeMOD^à human simulation software, Smith & Nephew		engineers were able to conduct proprietary analysis of the bone, ligament and muscle forces that impact the knee, and then account for those forces within the design of an implant that restores anatomic shapes and normal motion. JOURNEY II BCS is made from Smith & Nephew’s VERILAST Technology. The combination of two wear reducing materials – proprietary OXINIUM alloy and a highly cross-linked plastic liner, VERILAST Technology generates a significant reduction in implant wear compared to traditional bearing couples on the market.


		Corporate governance
		Our Board of Directors		44
		Our Executive Officers		46
		Corporate Governance Statement		48
		Audit Committee Report		58
		Directors’ remuneration report		62
		We have built our reputation by supporting healthcare professionals for more than 150 years and are proud of the trust they place in us.


Sir John Buchanan (70) Chairman Sir John was appointed Independent Non-executive Director in 2005 and was appointed Chairman and Chairman of the Nomination & Governance Committee in April 2006. He will retire from the Board following the Annual General Meeting on 10 April 2014. Sir John has broad international experience gained in large and complex international businesses, with extensive former board experience at Vodafone Group Plc, AstraZeneca PLC and Boots Group PLC. He has substantial experience in the petroleum industry and knowledge of the international investor community. He has held various leadership roles in strategic, financial, operational and marketing positions, including executive experience in different countries. He is a former Executive Director and Group Financial Officer of BP, serving on the BP Board for six years until 2003. Other Directorships – Chairman of ARM Holdings plc (until 1 March 2014) – Senior Independent Director of BHP Billiton Plc – Chairman of International Chamber of Commerce UK – Chairman of the Trustees for The Christchurch Earthquake Appeal (UK) Nationality British/New Zealand	Olivier Bohuon (55) Chief Executive Officer Olivier was appointed Chief Executive Officer in April 2011. He is a member of the Nomination & Governance Committee. Olivier has had extensive international and leadership experience within a number of pharmaceutical and healthcare companies. Prior to joining Smith & Nephew, he was President of Abbott Pharmaceuticals, a division of Abbott Laboratories based in the US, where he was responsible for the entire business, including R&D, global manufacturing and global support functions. Other Directorships – Non-executive Director of Virbac group Nationality French	Julie Brown (51) Chief Financial Officer Julie was appointed Chief Financial Officer on 4 February 2013 and elected by Shareholders at the Annual General Meeting on 11 April 2013. Julie is a Chartered Accountant and Fellow of the Institute of Taxation with international experience and a deep understanding of the healthcare sector. She trained with KPMG and then worked for AstraZeneca PLC, where she served as Vice President Group Finance, and more recently, as Interim Chief Financial Officer. Prior to that she held commercial roles as Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D Chief Financial Officer. She has previously held Vice President Finance positions in all areas of the healthcare value chain including commercial, operations, R&D and business development. Nationality British

Roberto Quarta (64) Independent Non-executive Director and Chairman Elect Roberto was appointed Non-executive Director and Chairman Elect on 4 December 2013. He is a member of the Nomination & Governance Committee. Roberto has significant management experience spanning a broad range of manufacturing and service businesses in both the UK and internationally. He is Chairman of IMI plc, a FTSE 100 listed engineering business, Chairman of Clayton, Dubilier & Rice and Chairman of the Supervisory Board of Rexel SA. Previously, he was Chief Executive and then Chairman of BBA Group plc. Other Directorships – Chairman of IMI plc – Chairman of Clayton, Dubilier & Rice – Chairman of the Supervisory Board of Rexel SA Nationality American/Italian	Richard De Schutter (73) Senior Independent Director and Non-executive Director Richard was appointed Non-executive Director in January 2001 and Senior Independent Director in April 2011. He is a member of the Nomination & Governance, Ethics & Compliance, Audit and Remuneration Committees. He will retire from the Board following the Annual General Meeting on 10 April 2014. Richard has had extensive US corporate experience at Chief Executive and Chairman level in a number of major corporations with primarily a scientific, chemical, engineering or pharmaceutical focus including G.D. Searle & Co., Monsanto Company, Pharmacia Corporation and DuPont Pharmaceuticals Company. Other Directorships – Non-executive Chairman of Incyte Corporation – Non-executive Chairman of Durata Therapeutics, Inc. – Non-executive Director of Navicure, Inc. – Non-executive Director of Sprout Pharmaceuticals, Inc. Nationality American	Ian Barlow (62) Independent Non-executive Director Chairman of the Audit Committee Ian was appointed Non-executive Director in March 2010 and Chairman of the Audit Committee in May 2010. Ian is a Chartered Accountant and has had considerable financial experience both internationally and in the UK. Prior to his retirement in 2008, he was a Partner at KPMG, latterly Senior Partner, London. During his career with KPMG, he was Head of their UK tax and legal operations, and he acted as Lead Partner for many large international organisations operating extensively in North America, Europe and Asia. Other Directorships – Lead Non-executive Director chairing the Board of Her Majesty’s Revenue & Customs – Non-executive Director of The Brunner Investment Trust PLC – Non-executive Director of Foxtons Group plc – Board Member of the China-Britain Council – Chairman of The Racecourse Association Nationality British


Olivier Bohuon is supported in the day-to-day management of the Group by a strong team of Executive Officers:	Julie Brown (51) Chief Financial Officer Julie joined the Board on 4 February 2013 as Chief Financial Officer. She is a Chartered Accountant and Fellow of the Institute of Taxation with international experience and a deep understanding of the healthcare sector. Previous Experience Julie trained with KPMG and then worked for AstraZeneca PLC, where she served as Vice President Group Finance, and more recently, as Interim Chief Financial Officer. Prior to that she held commercial roles as Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D Chief Financial Officer. She has previously held Vice President Finance positions in all areas of the healthcare value chain including commercial, operations, R&D and business development. Nationality British	Mike Frazzette (52) President, Advanced Surgical Devices Mike joined Smith & Nephew in July 2006 as President of the Endoscopy Global Business Unit. Since July 2011, he has headed up the Advanced Surgical Devices division and is responsible for the Orthopaedic Reconstruction, Trauma and Endoscopy business. He is based in Andover, Massachusetts. Previous Experience Mike has held a number of senior positions within the global medical devices industry. He was President and Chief Executive Officer of Micro Group, a US manufacturer of medical devices, and spent 15 years at Tyco Healthcare (Covidien) in various commercial roles eventually becoming President of the Patient Care and Health Systems divisions. Nationality American

	Roger Teasdale (46) President, Advanced Wound Management Roger joined Smith & Nephew in 1989 within the Wound Management business. He was appointed President of Advanced Wound Management in May 2009. He is based in Hull, UK. Previous Experience Roger has held a number of key roles within the Smith & Nephew Group in both the UK and the US and has been responsible for leading the transformation of the Wound business in recent years. Nationality British	Rodrigo Bianchi (54) President, IRAMEA Rodrigo joined Smith & Nephew in July 2013 with responsibility for Greater China, India, Russia, Asia, Middle East and Africa, focusing on continuing our strong momentum in these regions. He is based in Dubai. Previous Experience Rodrigo’s experience in the healthcare industry includes 26 years with Johnson & Johnson in progressively senior roles. Most recently, he was Regional Vice President for Medical Devices and Diagnostics division in the Mediterranean region and prior to that President of Mitek and Ethicon. He started his career at Procter & Gamble, Italy. Nationality Italian


We are organised by


Area of judgement		Our action
Trade receivables
Guidance was issued by the Financial Reporting Council in early 2012 on responding to increased country and currency risk particularly in Southern Europe.		Each quarter we received reports from management containing key metrics with regard to receivables with additional focus on receivables in Southern Europe. We discussed the risk associated with trade receivables in Southern Europe and the level of provisioning and concluded that the stated values were appropriate.
Taxation
Provisioning for potential current tax liabilities and the level of deferred tax asset recognition in relation to accumulated tax losses are underpinned by a range of judgements.		We annually review our system and principles for management of tax risks. We review quarterly reports from management evaluating existing risks and tax provisions. We also consider reports from our external auditor before determining that the levels of provisions was appropriate.
Business combinations
The Group has identified ‘growth through acquisitions’ as one of its Strategic Priorities and over the past 12 months we have made acquisitions in Turkey, India and Brazil.		For completed acquisitions, we received a report from management setting out the significant assets and liabilities acquired, details of the provisional fair value adjustments applied, an analysis of the intangible assets acquired, the assumptions behind the valuation of these acquired intangible assets, and the proposed useful economic life of each intangible asset class. These reports were reviewed and, following discussion, approved.


How the component supports the short- and long-term strategy of the Company		How the component operates
Base salary and benefits
Base salary
We are a FTSE 50 listed company, operating in over 100 countries around the world. Our strategy to generate cash from Established Markets in order to invest for growth in Emerging Markets means that we are competing for international talent and our base salaries therefore need to reflect what our Executive Directors would receive if they were to work in another international company of a similar size, complexity and geographical scope.		Salaries are normally reviewed annually, with any increase applying from 1 April. Salary levels and increases take account of: – market movements within a peer group of similarly sized UK listed companies; – scope and responsibility of the position; – skill/experience and performance of the individual Director; – general economic conditions in the relevant geographic market; and – average increases awarded across the Company, with particular regard to increases in the market in which the Executive is based.
Payment in lieu of pension
In order to attract and retain Executive Directors with the capability of driving our corporate strategy, we need to provide market-competitive retirement benefits similar to the benefits they would receive if they were to work for one of our competitors. At the same time, we seek to avoid exposing the Company to defined benefit pension risks, and where possible will make payments in lieu of providing a pension.		Current Executive Directors receive an allowance in lieu of membership of a Company-run pension scheme. Base salary is the only component of remuneration that is pensionable.
Benefits
In order to attract and retain Executive Directors with the capability of driving our corporate strategy, we need to provide a range of market-competitive benefits similar to the benefits they would receive if they were to work for one of our competitors. It is important that our Executive Directors are free to focus on the Company’s business without being diverted by concerns about medical provision, risk benefit cover or, if required, relocation issues.		A wide range of benefits may be provided depending on the benefits provided for comparable roles in the location in which the Executive Director is based. These benefits will include, as a minimum, healthcare cover, life assurance, long-term disability, annual medical examinations, company car or car allowance. The Committee retains the discretion to provide additional benefits where necessary or relevant in the context of the Executive’s location. Where applicable, relocation costs may be provided in line with Company’s relocation policy for employees, which may include removal costs, assistance with accommodation, living expenses for self and family and financial consultancy advice. In some cases such payments may be grossed up.
All-employee arrangements
All-employee share plans
To enable Executive Directors to participate in all-employee share plans on the same basis as other employees.		ShareSave Plans are operated in the UK and 27 other countries internationally. In the US, an Employee Stock Purchase Plan is operated. These plans enable employees to save on a regular basis and then buy shares in the Company. Executive Directors are able to participate in such plans on a similar basis to other employees, depending on where they are located.


How the component supports the short- and long-term strategy of the Company		How the component operates
Annual incentives
Annual Incentive Plan – Cash Incentive
To motivate and reward the achievement of specific annual financial and business objectives related to the Company’s strategy and sustained through a clawback mechanism explained more fully in the notes. The objectives which determine the payment of the annual cash incentive and the level of the annual equity award are linked closely to the Group strategy. The financial measures of revenue, trading profit and cash flow underlie our strategy for growth and the need to generate cash to fund future growth. The business objectives are also linked to the Group strategy. These change from year to year to reflect the evolving strategy, but will typically be linked to the Strategic Priorities set out on page 10 of this Annual Report. The Implementation Report each year will explain how each objective is linked to a specific strategic priority. For example, a Reinvestment objective links to the priority of improving the efficiency of the business model and investment in higher growth segments and geographies and Processes and People objectives link to developing the right organisation.		The Annual Incentive Plan comprises a cash and an equity component, both based on the achievement of financial and business objectives set at the start of the year. The cash component is paid in full after the end of the performance year. At the end of the year, the Remuneration Committee determines the extent to which performance against these has been achieved and sets the award level.
Annual Incentive Plan – Equity Incentive
To drive share ownership and encourage sustained high standards through the application of a ‘malus’ provision over three years, explained more fully in the notes.		The equity award component comprises conditional share awards (made at the time of the cash award), with vesting phased over the following three years. The equity component vests ¹⁄₃, ¹⁄₃, ¹⁄₃ on successive award anniversaries, only if performance remains satisfactory over each of these three years; otherwise the award will lapse. Participants will receive an additional number of shares equivalent to the amount of dividend payable per vested share during the relevant performance period.
Long-term incentives (awards actively being made)
Performance Share Programme
To motivate and reward longer term performance linked to the long-term strategy and share price of the Company. The performance measures which determine the level of vesting of the Performance Share Awards are linked to our corporate strategy. Our strategy requires the generation of cash in order to invest for growth. Cash flow is therefore a key performance measure in our performance share plan. Growth in our Emerging & International Markets is a key part of our strategy. Revenue in our Emerging & International Markets is therefore included as one of our performance share plan measures. If our strategy succeeds, the total return to our shareholders will also increase and therefore we include a relative TSR measure in our long-term share plan.		The Performance Share Programme comprises conditional share awards which vest after three years, subject to the achievement of stretching performance targets linked to the Company’s strategy. Awards may be subject to clawback in the event of material financial misstatement or misconduct. Participants will receive an additional number of shares equivalent to the amount of dividend payable per vested share during the relevant performance period.
One-off share awards
In order to implement our Group strategy, we recognise that it is not always possible to promote from within the Company. In the event that we recruit an Executive Director who is currently employed by another company, we recognise that we might be required to compensate that Executive Director for cash or share awards, they may forfeit on leaving their former employer. Our policy regarding such awards is detailed in the notes.		One-off share awards may be made under the provisions of Listing Rule 9.4.2 to facilitate the appointment of a new Executive Director. Such awards will be made on a case-by-case basis depending on the circumstances at the time to take account of amounts forfeited elsewhere on accepting appointment.


					Fixed pay		Annual variable pay		Hybrid		Long-term variable pay				Other items in the nature of remuneration
Director	Base salary		Payment in lieu of pension		Taxable benefits		Annual Incentive Plan – cash		Annual Incentive Plan – equity		Performance Share Plan		Share Option Plan		All-Employee Share Plans		One-off awards		Total
Olivier Bohuon Appointed 1 April 2011
2013		$1,425,559		$427,668		$107,160		$1,793,584		$933,410		$0		$0		–		–		$4,687,381
2012		$1,394,190		$418,257		$482,815		$1,755,285		$906,224		–		–		–		–		$4,956,771
Julie Brown Appointed 4 February 2013
2013		$708,450		$212,536		$22,510		$858,978		$390,800		–		–		$5,684		$838,266		$3,037,224