UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14978

Smith & Nephew plc

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

15 Adam Street, London WC2N 6LA

(Address of principal executive offices)

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

Title of each class	Name on each exchange on which registered
American Depositary Shares Ordinary Shares of 20¢ each	New York Stock Exchange New York Stock Exchange*

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

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: 951,021,116 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:

Large Accelerated Filer  x                 Accelerated Filer  ¨                 Non-accelerated filer  ¨

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

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

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

	What’s in this report
	Strategic Report
	4	Financial highlights
	5	Chairman’s statement
	6	Chief Executive Officer’s review
	8	Smith & Nephew today
	14	Strategic performance
	16	Chief Financial Officer’s overview
	18	Our marketplace
	21	Our business
	26	Advanced Surgical Devices
	30	Advanced Wound Management
	34	Financial review and principal risks
	40	Sustainability
	Supporting Healthcare professionals
	42	Case studies
	Corporate Governance
	54	Our Board of Directors*
	58	Our Executive Officers*
	62	Corporate Governance Statement*
	75	Audit Committee Report*
	81	Directors’ Remuneration report
	Financial statements and other information
	103	Directors’ responsibilities for the accounts*
	105	Independent auditor’s US reports
	106	Independent auditor’s UK report
	110	Group accounts
	117	Notes to the Group accounts
	166	Company accounts
	167	Notes to the Company accounts
	170	Group information*
	174	Other financial information*
	184	Information for shareholders*
	200	Smith & Nephew heritage
	*   These sections and pages 111, 113 and 115 form the Directors’ Report.

2 Smith & Nephew Annual report 2014

Our mission

Delivering advanced medical

technologies that help healthcare

professionals, our customers,

improve the quality of life for

their patients

and this will drive our performance
$4.6bn	$1,055m	$749m
Revenue1 up 2%	Trading profit1,2 up 3%	Operating profit1 down 8%
83.2¢	56.1¢	29.6¢
Adjusted earnings per share2 up 8%	Earnings per share down 9%	Dividends per share up 8%

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 176 to 179.

Smith & Nephew Annual report 20143

STRATEGIC REPORT

Financial highlights

Continuing to improve

our performance

			1  The underlying percentage increases/decreases are after adjusting for the effects of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. 2  These are non-GAAP measures and exclude restructuring/rationalisation costs, acquisition and disposal-related costs, amortisation of acquisition intangibles and other transactions which affect short-term profitability. An explanation of these measures is provided on pages 176 to 179.

4 Smith & Nephew Annual report 2014

Chairman’s statement

Dear Shareholder,	Board changes	First impressions
I joined Smith & Nephew in December 2013, and succeeded Sir John Buchanan as Chairman in April 2014. In my first letter to you I am pleased to report that Smith & Nephew made good progress last year, delivering strong earnings growth and enhanced value for shareholders. We did this whilst making major investments to reshape the Group for future success such as the acquisition of ArthroCare Corporation for $1.5 billion net. Revenue was $4,617 million, up 2% on an underlying basis or 6% on a reported basis. Trading profit was $1,055 million, up 3% on an underlying basis or 7% on a reported basis. The trading profit margin of 22.9% was 20bps up on the previous year. The Board is pleased to propose a Final Dividend for the year just gone of 18.6¢ per share, giving a total dividend for 2014 of 29.6¢, up 8% year-on-year.	Sir John Buchanan retired as Chairman in April at the 2014 Annual General Meeting, after nine years of outstanding service. On behalf of the Board and the whole of Smith & Nephew I thank him for his leadership. Richard (‘Dick’) de Shutter also retired at the Annual General Meeting. In his role as Senior Independent Director, Dick provided wise counsel through a period of significant growth and change. Ajay Piramal retired in March, having provided valuable insight into the emerging markets as we built our presence there. Pamela Kirby retired from the Board in July. She also made a major contribution – particularly as Chairman of the Ethics & Compliance Committee. I thank Dick, Ajay and Pamela for their service. It is a credit to the growing strength and reputation of the Company that we have attracted top global talent to succeed these individuals. Vinita Bali joined the Board in December following an impressive career at blue-chip global corporations such as The Coca-Cola Company in multiple geographies including India, Africa, South America, the US and UK. Her strong appreciation of customer service and marketing will bring deep insight to Smith & Nephew as we continue to develop innovative ways to serve our markets. Erik Engstrom, the CEO of Reed Elsevier, joined the Board in January 2015. His understanding of how technology can be used to transform a business will be invaluable.	My first impression of Smith & Nephew was of a Company with strong leadership, a clear strategy and sound financial platform. The open communication between the Board and the executive team is a real strength of the business. I was particularly impressed with the execution of the ArthroCare acquisition, especially the thoroughness of our due diligence and how well the team is managing the integration. I have also been able to spend time visiting our sites and meeting employees, including attending a Sports Medicine procedure to witness how our highly-skilled reps assist surgeons in improving outcomes. I have consistently found a business with a strong culture, particularly in areas of ethics and compliance, and people who are proud of their work supporting healthcare professionals. Looking ahead I see many exciting opportunities – in the Established Markets where we are challenging the status quo through new commercial models, in the Emerging & International Markets where we have a leadership platform – and from recent acquisitions. In 2015, I believe we will begin to see more clearly the benefits of the transformational work that has been undertaken at Smith & Nephew, and I look forward to sharing more news of these achievements next year. Yours sincerely, Roberto Quarta Chairman

  “Smith & Nephew made  good progress last year,  delivering strong earnings  growth and enhanced  value to shareholders.”

Smith & Nephew Annual report 20145

STRATEGIC REPORT

Chief Executive Officer’s review

A good financial performance while strengthening the business

“The journey to reshape  Smith & Nephew continues  and I am excited by our  prospects for accelerating  growth in 2015 and beyond.”

Dear Shareholder Smith & Nephew proudly supports healthcare professionals in their daily efforts to improve the lives of their patients. We do this by taking a pioneering approach to the design of our products and services, by striving to ensure wider access to our advanced technologies, and by enabling better outcomes for patients and healthcare systems. In doing so, we drive growth and create value for our stakeholders. In 2014, we made great progress. We drove a much improved performance in US Hip and Knee Implants and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities. Advanced Wound Bioactives, acquired at the end of 2012, again produced double-digit growth. Our continued investment in Emerging & International Markets drove revenues up 17%. Performance in Europe was weaker and Advanced Wound Management was held back by a distribution hold on RENASYSà in the US, and I am confident that we have taken actions that will deliver a better 2015 across these areas. Additionally, the Phase 3 trial results for HP802 were a disappointment, but we remain committed to developing pioneering Advanced Wound Bioactives treatments. The Group generated a good increase in revenues and trading profit, and an 8% uplift in EPSA. I am pleased by the changing mix of the business, as we successfully rebalance by strengthening our higher growth platforms. These now represent more than half of our revenue, up from just 35% three years ago. Pioneering design Smith & Nephew has a long history of pioneering design, dating back to our foundations in the 19th century. In 2014, we launched many exciting products, including a cruciate retaining version of our JOURNEYàII natural-motion knee, a first-of-its-kind DYONICSà PLAN surgical planning tool for hip arthroscopy, and the HAT-TRICK Lesser Toe Repair System. We continued to invest more in R&D, over 5% of revenue, and have a strong pipeline for 2015 and beyond.

6 Smith & Nephew Annual report 2014

For us, innovation is not just about products. It is also about how we do business. We seek new ways to serve our customers. In 2014, we pioneered a new commercial solution for Orthopaedic Reconstruction that fulfils the unmet needs of customers searching for a different value proposition. Called Syncera^à, this offers clinically proven primary hip and knee implants combined with cutting-edge technology to streamline the extensive support process. Syncera has the potential to generate significant savings for the customer. We are encouraged by the contracts signed and prospective customers.   Widening access   In the Emerging & International Markets we have built an entrepreneurial business resourced to maximise the significant opportunities we see. In 2014, it generated more than $600 million revenue, with China, our largest market, growing revenue at over 30%. 15% of Group revenue came from these markets in 2014, up from 8% in 2010.   In 2014, we established a new commercial structure to market and expand our mid-tier value product ranges. This will provide wider access to our advanced technologies, helping us support an ever greater number of customers in delivering affordable healthcare.   Enabling better outcomes   We provide high quality products and medical education to help drive better clinical outcomes. During 2014, we saw strong and rising demand for unique products such as our hard-wearing VERILAST^à Hips and Knees, VISIONAIRE^à patient-matched instrumentation and the PICO^à portable disposable Negative Pressure Wound Therapy system. These, and many other advanced Smith & Nephew products, also enable healthcare professionals to treat more patients faster, improving the economic outcome for the healthcare system payers.   Strengthening our platform   In recent years, we have successfully supplemented our organic growth through acquisitions. Healthpoint Biotherapeutics gave us a leading position in Advanced Wound Bioactives, the fastest growing segment of Advanced Wound Management. We have also completed a number of acquisitions in the Emerging & International Markets, strengthening our platform by adding products, manufacturing, distribution and sales teams. ArthroCare, completed in May 2014, has strengthened our Sports Medicine business. Its technology and products significantly enhance our portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well.   Enhanced efficiency   By simplifying and improving our operating model we are increasing our agility and efficiency. In 2011, we announced a programme to generate annual savings of $150 million. By 31 December 2014, we had achieved annualised savings of $146 million, enabling investment in the Emerging & International Markets, R&D and other growth opportunities.   In 2014, we announced a further programme to realise at least another $120 million of annual savings. This work is progressing well. For instance, we are rationalising our global property portfolio and found major savings through better procurement processes. These savings will more directly benefit the bottom line.   Great Place to Work   Achieving recognition as a Great Place to Work is important to me. It means having a workplace where employees are proud and excited to come each day because they are doing work that makes a difference for customers and patients. During 2014, I was proud to congratulate our colleagues in Spain for being the first country to achieve this distinction from the Great Place to Work Institute – and it will not be the last. Also, our sustainability performance was recognised again as we retained our rankings in both the FTSE4Good and Dow Jones Sustainability indices. Acting sustainably and responsibly to deliver long-term benefits to society is important. It is our employees who earn these awards, and I thank them for their efforts.   I am pleased with our momentum in 2014 as we delivered a good financial performance while strengthening the business, and you will find more details on our successful actions on pages 42 to 53. Whilst the journey to reshape Smith & Nephew continues, we enter 2015 stronger and more efficient and I am excited by our prospects for accelerating growth in 2015 and beyond.   Sincerely,     Olivier Bohuon Chief Executive Officer     Our results   22.9%   Trading margin¹ up 20bps   83.2¢   EPSA¹ up 8%             1   Explanations of these non-GAAP financial measures are provided on pages 176 to 179.

Smith & Nephew Annual report 20147

STRATEGIC REPORT

Smith & Nephew today

Our marketplace is growing

Demand for healthcare continues to increase worldwide. This is driven by increased longevity, more

prevalence of obesity and associated disease states, greater expectation of an active lifestyle, improved

awareness of treatment options and the increasing affluence of the emerging markets.

Advanced Surgical Devices	Advanced Wound Management
Total segment value	Total segment value
$24bn	$7bn
+5%	+4%

Our products are used by surgeons and nurses to help

repair and heal the human body throughout a person’s life

Global population

Source: United Nations – World Population Prospects, The 2012 Revision.

8 Smith & Nephew Annual report 2014

Served by our global businesses

Our global franchises design, develop and deliver our advanced medical technologies to customers in more than 100 countries globally.

Advanced Surgical Devices global
1. Orthopaedic Reconstruction
Specialist hip and knee implant systems.
Revenue1
$1,527m	+2%
2013  $1,518m
2. Trauma & Extremities
Internal and external devices used in the stabilisation of severe fractures and deformity correction procedures.
Revenue1
$506m	+4%
2013  $486m
3. Sports Medicine Joint Repair
Instruments, technologies and implants necessary to perform minimally invasive surgery of joints.
Revenue1
$576m	+8%
2013  $496m
4. Arthroscopic Enabling Technologies
Cutting, visualisation and fluid management technologies necessary for Sports Medicine Joint Repair.
Revenue1
$542m	+1%
2013  $441m
5. Other ASD
ENT and gynaecology instrumentation.
Revenue1
$147m	+10%
2013  $74m

Advanced Wound Management global
1. Advanced Wound Care
Products for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and post-operative wounds.
Revenue1
$805m	–4%
2013   $843m
2. Advanced Wound Devices
Traditional and single-use Negative Pressure Wound Therapy (‘NPWT’) and hydrosurgery systems.
Revenue1
$192m	–9%
2013   $213m
3. Advanced Wound Bioactives
Bioactive technologies that provide unique approaches to debridement and dermal repair and regeneration.
Revenue1
$322m	+15%
2013   $280m

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.

Smith & Nephew Annual report 20149

STRATEGIC REPORT

Smith & Nephew today continued

Our business model

delivers value

	Our Capital Allocation Framework
Maintain a strong balance sheet to ensure solid investment grade credit metrics

Resource utilised
$7.3bn	$235m	13,468	15	$245m
Total Assets	Investment in R&D	Employees	Manufacturing plants worldwide	Corporation tax paid

12 Smith & Nephew Annual report 2014

With a strategy to

drive our performance

Our strategic priorities

	Established Markets
	Build upon existing strong positions, win market share through greater product and commercial innovation and drive efficiencies to liberate resources.
	Emerging & International Markets
	Deliver thought leadership in the Emerging & International Markets by building strong, direct customer relationships, widening access to our premium products and developing portfolios designed for the mid-tier population.
	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.
	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.
	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.
u Read more about our strategy in action on pages 42 – 53

Smith & Nephew Annual report 201413

STRATEGIC REPORT

Strategic performance

How we performed

Established Markets Performance Established Markets for Smith & Nephew are Australia, Canada, Europe, Japan, New Zealand and the US. Our combined businesses in the Established Markets delivered flat growth for the year. Headwinds in Europe impacted our performance and offset the positive growth we achieved across the US, Japan, Australia & New Zealand. In Advanced Wound Management, our performance was slightly below estimated global segment growth, despite a 15% growth in Advanced Wound Bioactives. While Trauma & Extremities, Hip Implants and Knee Implants growth were also slightly below the market, these franchises performed better than last year and demonstrated an improving trend in the second half of the year as a result of our investments in marketing, medical education and new products. In the higher growth Sports Medicine Joint Repair segment we delivered growth at around market rate and saw the first benefits of the ArthroCare acquisition. Global Outlook While there are some signs of improvement in economic conditions, overall the Established Markets continue to experience a challenging environment. We have responded by realigning our business models and made focused investments to enhance our performance and efficiency in these markets.	Emerging & International Markets Performance Emerging & International Markets represent those outside of the Established Markets including the fast growing BRIC group of Brazil, China, India and Russia. Our Emerging & International Markets grew at 17%, building further on the double-digit growth of 2013. These geographies now represent 15% of the Group’s overall revenue, up from 11% in 2011. During 2014: –   Our success in China continued with growth of over 30%, for a second year in a row, as our investment in training and infrastructure continue to show results. –   Our Latin American markets, which include Brazil and Mexico, are set for improvement going forward as we spent the year integrating acquisitions and making organisational and strategic changes. –   The execution of our mid-tier market strategy continues with the establishment of an independent commercial structure and increased investment in building a suitable product portfolio. Global Outlook The healthcare environment in our regions continues to rapidly expand and with the right investments combined with strategic execution will provide sustained growth opportunities for the Group.	Innovate for value Performance For Smith & Nephew ‘Innovate for value’ means having a pioneering approach to creating both products and new commercial models to bring products and services to our customers. Consistent with 2013, R&D investment represented over 5% of revenue, bringing a wide range of products to market across all our franchises. More detail on individual products is set out on pages 21 to 22 and on pages 27 and 31. In addition we have made investments in two venture funds as part of our search for future disruptive technologies. We have also been investing in an innovative commercial solution for Orthopaedic Reconstruction that fulfils the unmet needs of customers searching for a different value proposition. Called Syncera, it offers customers clinically proven primary hip and knee implants combined with cutting-edge technology that streamlines the supply chain and logistics and enables technical support in the operating room. This new model has the potential to generate significant savings for the customer. A pioneering approach to products and services provides competitive advantages. Smarter, easier to use, cost-efficient products and services can offset pricing pressures, disrupt markets and challenge the status quo, which will be required to meet the new and expanding demands for healthcare customers globally.

14 Smith & Nephew Annual report 2014

Simplify and improve our operating model Performance Trading profit grew by 3% and trading profit margin increased by 20bps while investing in our commercial operations and meeting market and pricing pressures. Key initiatives included: –   Continuing to deliver our $150 million per annum efficiency savings programme, of which we have achieved annualised savings of $146 million as at 31 December 2014. –   Commencing a further $120 million annualised Group Optimisation plan through a one-off investment of $150 million, which is progressing well. –   Moving to a single Managing Director model in markets outside of the US, combining the commercial organisations to leverage scale and better serve customers. By simplifying and improving our operating model we have been able to liberate resources to invest in growth opportunities, meet the persistent price pressure and improve our financial returns. A simpler and more efficient organisation allows us to make faster and better decisions.	Supplement organic growth with acquisitions Performance In 2014, we completed five acquisitions and investments, including our largest deal to date, the $1.7 billion acquisition of ArthroCare Corporation. This brings the total over the last 4 years to 15 transactions for a combined consideration of $2.8 billion, including the $782 million acquisition of Healthpoint Therapeutics in late 2012. ArthroCare was a compelling opportunity to add unique technology and highly complementary products to further strengthen our sports medicine business. We will be able to generate significant additional revenue from the more comprehensive portfolio. We will use our global presence to drive substantial new growth. The transaction accelerates our strategy to rebalance Smith & Nephew towards higher growth opportunities. We regularly review acquisitions to ensure they are meeting our expectations, and use IRRs and ROCE to confirm performance is on track to deliver the required return. During 2014 we continued to integrate our recent emerging markets acquisitions, whilst Healthpoint performed strongly in its second full year in Smith & Nephew. 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 176 to 179.

Smith & Nephew Annual report 201415

STRATEGIC REPORT

Chief Financial Officer’s overview

We made significant

progress in 2014...

    Our results   $4,617m Revenue¹ up 2%     $1,055m Trading profit^1,2 up 3%               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 176 to 179. Dear Shareholder,   Smith & Nephew made significant progress in 2014 and continued to deliver good revenue and earnings growth. Our growth trajectory is being enhanced by the integration of our acquisitions, greater Group efficiency, and tax improvement – combining with strong cash generation and disciplined capital allocation to accelerate value creation for shareholders.   Strong earnings growth   In the full year 2014, we generated revenue of $4,617 million (2013: $4,351 million), an increase of 2% on an underlying basis and 6% on a reported basis. Acquisitions added 5% to the reported growth rate, while currency was a -1% headwind.   Trading profit was $1,055 million (2013: $987 million), up 3% underlying and 7% on a reported basis. The trading profit margin was 22.9% (2013: 22.7%), a 20bps increase despite the headwind from the US RENASYS distribution hold announced in June.   Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred. The net interest charge and other financing costs for 2014 were $33 million (2013: $7 million). Profit before tax was therefore $714 million (2013: $802 million).   The tax charge of $213 million reflects an effective tax rate of 27.7% for the full year (2013: 29.2%) on Trading results.   EPSA was 83.2¢ (166.4¢ per ADS) (2013: 76.9¢). Reported basic earnings per share was 56.1¢ (112.2¢ per ADS) (2013: 61.7¢).   Trading cash flow was $781 million (2013: $877 million), reflecting a trading profit to cash conversion ratio of 74% (2013: 89%).   Net debt at the year-end was $1,613 million reflecting our acquisitions of ArthroCare and in the emerging markets. This represents a reported net debt/EBITDA ratio of 1.2x. Reinvestment & Group optimisation   During 2014, we launched a programme to target further efficiencies. We have identified four main areas of activity:   1  Globalising functions such as Finance, HR, IT and Legal to ensure that we are operating most effectively to support business growth.   2  Driving procurement savings to get the most value from the money we spend.   3  Rationalising our footprint to simplify the way we work.   4  Further simplifying our operating model, including establishing a single operating structure under a single managing director in all markets outside the US so that we can make decisions more quickly and effectively.   All areas of the programme are progressing well. Overall, we are on target to deliver benefits of over $120 million over a four-year period, with the majority of this expected to benefit margin over time.   Acquisitions   We acquired ArthroCare Corporation in 2014 for a net $1.5 billion. This has strengthened our Sports Medicine business. Its technology and products will significantly enhance our portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well.   The financial rationale for this transaction was strong, and we expect to realise cost and revenue synergies of around $85 million of additional annual trading profit in 2017.   Our other recent acquisitions continue to perform well. The Advanced Wound Bioactives business acquired at the end of 2012 delivered strong 15% growth in 2014. Our emerging markets acquisitions in Brazil, Turkey and India are now bedded in and delivering increasing benefits. And Bioventus, our orthobiologic therapies development vehicle, completed a successful external refinancing and repaid a $160 million loan-note, plus $28 million of accrued interest, to us in October.

16 Smith & Nephew Annual report 2014

...and continued to deliver good

revenue and earnings growth.

Segment reporting As we simplify our operating model and move to one commercial organisation in all countries barring the US, we are updating our segmental reporting to reflect this, providing disclosure consistent with the financial information used by senior management to run the business. This means that from 1 January 2015 we will continue to disclose revenue performance by franchise, but other financial data, such as trading margin and assets, will no longer be split between two divisions – Advanced Surgical Devices (‘ASD’) and Advanced Wound Management (‘AWM’), since they are now part of one operating unit. Outlook We have made material progress in reshaping Smith & Nephew for higher growth since 2011. Whilst the journey to transform Smith & Nephew continues, increasingly we expect to benefit from the actions and investments we have made. We expect the Group to deliver higher underlying revenue growth in 2015 than in 2014. We also expect to deliver a further improvement in trading profit margin. Additionally, we expect the effective corporate tax rate on trading results to reduce to slightly above 27% in 2015, absent any changes to tax legislation. This is incremental to the 220bps reduction achieved in the last two years. We believe the Group is at the start of a new and exciting phase in its 158-year history. Sincerely, Julie Brown Chief Financial Officer		“We expect the Group to   deliver higher underlying   revenue growth in 2015   than in 2014. We also   expect to deliver a further   improvement in trading   profit margin.”

Smith & Nephew Annual report 2014            17

STRATEGIC REPORT

Our marketplace

Changing demands

Market trends   The combination of ageing populations and increasing prevalence of obesity and associated chronic illness is expanding the gap between the demand for healthcare and ability of governments to supply it. The changing balance in ageing populations also means that there is a potential decrease in funds available for healthcare raised through taxes on the working population. Consequentially, governments and healthcare providers are looking for various ways to constrain their healthcare expenditure.   Cost and Outcomes   Healthcare providers, in an effort to reduce spending, are increasingly focusing on the cost of the whole treatment, rather than the individual components. This is leading governments and hospitals to seek greater transparency of product pricing.   As a result, health economic data is being used to obtain reimbursement or justify product pricing. Health economic data currently forms an integral part in shaping the recommendations from the National Institute for Health and Care Excellence (NICE) in the UK and in the US, the Affordable Care Act has committed budget spend to carry out comparative effectiveness research on treatments.   As well as the focus on suppliers of healthcare products, some providers are also implementing incentives for better health outcomes to reduce the costs associated with repeated patient treatments or reduced hospital stay.   Governments are beginning to impose penalties on healthcare facilities for acute patient re-admissions or for infections acquired within the health system which present an additional economic burden on health care systems. In the US, healthcare-acquired infections cost almost $10 billion annually, with surgical site infections being the largest contribution to overall cost.   Product innovation has been the primary response by some suppliers in meeting patient and healthcare provider demands to improve outcomes, simplify procedures and reduce cost.   New commercial models, together with product innovation, are being adopted by health systems as a solution to improving resource allocation. There is a recent trend by health systems to shift towards ‘payment for performance’ schemes in an effort to promote high quality care and increase the effectiveness of treatments. Additionally, suppliers of healthcare products and devices are providing lower cost or reduced service offerings to those segments of the market more sensitive to price.   The healthcare industry is also seeing protectionism/localisation playing a part in the product selection process as some jurisdictions are implementing laws to show bias towards locally manufactured products. This already exists in Brazil for major tender offers and China is considering incentives to encourage hospitals to use locally made medical devices.   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. Self-Care and Prevention   Self-care and prevention is regarded as an important element of healthcare in that it will help protect society from potential health threats by minimising the risk factors that cause them. Governments have been investing in programmes and providing tools to encourage and support healthier behaviour to reduce the strain on healthcare systems from ‘lifestyle’ diseases. Additionally, pressure is gradually being applied on the food industry to reduce saturated fats, sugar and salt in products and increase nutritional labelling in an effort to tackle rising rates of obesity and diabetes.   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 safe and effective products and done so in an environmentally sustainable way.   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 the placement on market 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, the China Food and Drug Administration and the Australian Therapeutic Goods Administration.

18 Smith & Nephew Annual report 2014

In general, with the aforementioned industry trends, safety standards and regulations in the medical device industry are becoming more stringent. Regulatory agencies are intensifying audits of manufacturing facilities and the approval time for new products has lengthened. Legislation covering corruption and bribery such as the UK Bribery Act and the US Foreign Corrupt Practices Act business also apply to all our global operations.   We are committed to assuring a high level of regulatory compliance and to doing business with integrity and welcome the trend to higher standards in the healthcare industry. We and other companies in the industry are subject to regular inspections and audits by regulatory agencies and notified bodies, and in some cases, remediation activities have and will continue to require significant financial and resource investment. See ‘Legal proceedings’ on page 146.   Dependence on government and other funding   In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets as a result of government policy. We are therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.   Pricing of our products is largely influenced in most developed markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where we operate. This control may be exercised by determining prices for an individual product or for an entire procedure. We are exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on revenue and operating profit. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of our markets.   Competitors   Competition exists among healthcare providers to gain patients on the basis of quality, service and price. Providers are under pressure to reduce the total cost of healthcare delivery. In order to achieve this there has been some consolidation in our customer base, as well as amongst our competitors, and these trends are expected to continue in the long term. We compete against both local and multinational corporations, including some with greater financial, marketing and other resources.

Manufacturing facility in Suzhou, China.

Smith & Nephew Annual report 201419

STRATEGIC REPORT

Our marketplace continued

Smith & Nephew estimates that the global orthopaedic reconstruction segment is worth approximately $14 billion and increased by approximately 3% in 2014. Competitors in the orthopaedic reconstruction segment include Biomet, DePuy Synthes (a division of Johnson & Johnson), Stryker and Zimmer.   Smith & Nephew estimates that the global orthopaedic trauma segment is worth approximately $5 billion and grew by approximately 6% in 2014. Competitors in the orthopaedic trauma segment include Biomet, DePuy Synthes, Stryker and Zimmer.   Smith & Nephew estimates that the global sports medicine segment (representing access, resection and repair products) is worth approximately $5 billion and grew by approximately 8% in 2014. Competitors in the sports medicine segment include Arthrex, Conmed, DePuy Mitek (a division of Johnson & Johnson) and Stryker.   Smith & Nephew estimates that the global wound management segment is worth approximately $7 billion and grew by 4% in 2014. Global competitors vary across our product areas and geographies and include Acelity, Coloplast, ConvaTec, 3M and Molnlycke.   Customers   In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, the healthcare providers are largely government organisations funded by tax revenues. In the US, our major customers are public and private hospitals, which receive revenue from private health insurance and government reimbursement programmes. Medicare is the major source of reimbursement in the US for knee and hip reconstruction procedures and for wound treatment regimes. In the emerging markets, demand is driven by self-pay patients.   Seasonality   Orthopaedic and sports medicine procedures tend to be higher in the winter months when accidents and sports related injuries are highest. Conversely, elective procedures tend to slow down in the summer months due to holidays.   Due to the nature of our product range, there is little seasonal impact on the Advanced Wound Management business.

20 Smith & Nephew Annual report 2014

STRATEGIC REPORT

Our business

Delivering advanced medical technologies   Smith & Nephew’s business model, set out on page 12, 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 create value. This value creation process is actioned through five streams of activity.   –  Research & Development   –  Ethics & Compliance   –  Manufacturing   –  Medical Education   –  Sales & Marketing   Our business model is underpinned by our Capital Allocation Framework. This 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. Research and Development   We have a deep knowledge of the needs of surgeons, physicians 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 2014, we launched many exciting products, including a cruciate retaining version of our JOURNEY II natural-motion knee, a first-of-its-kind DYONICS PLAN surgical planning tool for hip arthroscopy, and the HAT-TRICK Lesser Toe Repair System. We have a strong new product pipeline for 2015, with many innovations scheduled.   These new products, and many more currently in development, are a result of our focus on R&D. We invested $235 million in this area in 2014, in-line with our commitment, stated in 2011, to increase our investment level to around 5% of revenue.   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. Our products undergo clinical and health economic assessment both during their development and post launch.   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. We scout globally for new technologies and services to meet the needs of our customers.   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. We also work with MassChallenge, a global start-up competition and accelerator programme, to support emerging companies that fit with our strategic areas of interest.

Smith & Nephew Annual report 201421

STRATEGIC REPORT

Our business continued

We continued in 2014 as 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.   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 addition, Smith & Nephew invests in early stage technologies relevant to our business. Recent examples include UK-based Michelson Diagnostics that is developing a point-of-care tissue-imaging system that for the first time allows users to see below the surface of the skin; and an incubator fund investing in orthopaedic technologies close to commercial launch.   We continue to scout for further opportunities where we can access new disruptive technologies in our areas of specialism. These investments are typically in technologies that are not yet ready for acquisition but that we believe hold great promise. As well as funding, we may bring R&D, management and manufacturing expertise, and gain privileged access to or rights to the technology. We aim to accelerate the journey to market and may ultimately acquire the business.   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.   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. Ethics 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. 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 2014, we updated our Code training. The new module is more interactive, role-based and allows individuals to apply the Code in different scenarios. Individuals can earn ‘trust points’ and ‘achievement badges’ if they make the right choices in the scenarios. Individuals who show an understanding of the Code by selecting the right behaviour in a scenario can move through the module more quickly than individuals who choose the incorrect behaviour and are then subject to remediation.   Global compliance programme   Smith & Nephew has implemented what we believe is a world-class Global Compliance Programme that helps our businesses comply with laws and regulations. Our comprehensive compliance programme includes global policies and procedures; on-boarding and annual training for employees and managers; 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 significant interactions with healthcare professionals or government officials. We regularly assess existing and emerging risks in the countries in which we operate. Managing Directors complete an annual certification to the CEO to confirm implementation of required programmes. Managers and employees make an annual compliance certification, and executive management, managers and employees have a compliance performance objective customised to their level in the organisation.   In 2014, we developed and piloted a face-to-face course for new managers, which supplements the on-line manager certification training. In 2015, all new managers will be required to complete both the on-line and the face-to-face course.   New distributors and other higher risk third parties are subject to screening and are contractually obligated to comply with applicable laws and our Code. Their management is required to take compliance training and certify that they will ensure their employees and agents comply with the law and our Code. They also receive a CD-ROM with tools to assist them with their own compliance programmes. We have expanded our oversight of independent agents and distributors with on-site assessments to check compliance controls and monitoring visits to review a sample of transactions from their books and records.   In 2014, Smith & Nephew filed its first report in compliance with the US Physician Payments Sunshine Act, which comprised over 22,000 transactions with nearly $18 million in payments and expenses to reportable individuals and entities.   In early 2015, Smith & Nephew submitted the final report to the US Department of Justice (‘DoJ’) and the US Securities and Exchange Commission (‘SEC’) required under the Company’s Foreign Corrupt Practices Act settlement agreement. We also filed our first report under the deferred prosecution agreement we inherited with the ArthroCare acquisition (see Note 17.3 of the Notes to the Group accounts).

22 Smith & Nephew Annual report 2014

              High quality manufacturing An employee at our manufacturing plant in Tuttlingen, Germany, working on a polished cementless hip stem.

Manufacturing   We operate manufacturing facilities in a number of countries across the globe, and a number of central distribution facilities in key geographical areas in which we operate. Products are shipped to individual country locations which hold small amounts of inventory locally for immediate supply to meet customer requirements. We have a defined manufacturing and facility footprint plan in-line with our commercial strategy which we review on a regular basis.   We continue to implement improved processes such as ‘Lean Manufacturing’ throughout our factories, the global supply chain and the supporting operations to improve and sustain the levels of safety, quality, delivery, productivity and efficiency. We have numerous Core Competences including: materials technology; precision machining, high volume and automated manufacturing for both our Advanced Surgical Devices and Advanced Wound Management products.   We procure raw materials, components, finished products and packaging materials from key suppliers. These purchases include metal forgings and stampings for orthopaedic products, optical and electronic subcomponents for sports medicine products, active ingredients and semi-finished goods for Advanced Wound Management as well as packaging materials across all product ranges.   Suppliers are selected, and standardised 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 certain parts of our manufacturing processes where necessary to obtain specialised expertise or gain lower cost without undue risk to our intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to our specification, and adhere to and maintain an appropriate quality system. Our specialist teams work with and monitor suppliers through on-site assessments and performance audits to ensure the required levels of quality, service and delivery.   Our largest manufacturing operation for Advanced Surgical Devices is based in Memphis (Tennessee, US), with additional production and assembly plants based in Mansfield (Massachusetts, US), Oklahoma City (Oklahoma, US), Austin (Texas, US), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China), Calgary (Canada), Warwick (UK), Heredia (Costa Rica) 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 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 Platinum Shaver Blades, ENDOBUTTON^à CL Ultra and the HEALICOIL^à 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^à Camera.   We operate three main holding warehouses, one in each of Memphis (Tennessee, US), Baar (Switzerland) and Singapore. These facilities consolidate and ship to local country and distributor facilities.   The Advanced Wound Management manufacturing is primarily managed from our factory and offices in Hull (UK). Wound Management products are also made at our facilities in Suzhou (China), Curaçao (Dutch Caribbean), Alberta (Canada) and Oklahoma City (Oklahoma, US).   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 products produced in Hull, such as JELONET^à and BACTIGRAS^à, transitioned to Suzhou in 2014, as part of our global footprint optimisation programme.

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STRATEGIC REPORT

Our business continued

OPSITE Post-Op Visible A waterproof, bacteria-proof dressing with see-through absorbant pad. Unique design allows continual monitoring of the incision site without the need to disrupt the healing process.
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. The facility in Gilberdyke (UK) was sold in 2014, and will continue to supply sub components to other facilities until 2016. The processes at the Alberta facility are being transferred to the Hull site during 2015. 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. 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 Curaçao, and at various third party facilities in the US. The products are distributed from a third party logistics facility in San Antonio (Texas, US). Advanced Wound Bioactives has facilities for the development and possible production of cell based therapies in Fort Worth (Texas, US).	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. In 2014, we provided training to more than 25,000 surgeons. 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 on-line resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website.	Sales and marketing Our customers are the providers of medical and surgical treatments and services in over 100 countries worldwide. The largest single customer worldwide is a purchasing group based in the UK that represented less than 5% of our worldwide revenue in 2014. 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. 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 country-specific commercial organisations manage 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.

24 Smith & Nephew Annual report 2014

Our people Smith & Nephew is committed to attracting, engaging, developing and retaining employees. In 2014, we had more than 14,000 employees dedicated to our core values of Innovation, Trust and Performance. These values represent the foundation of our culture, and underpin our commitment to be an employer of choice as well as a responsible corporate citizen. Investing in our people and communities helps ensure the long-term sustainability of our business. 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. In 2014, we conducted a Global Employee survey to measure progress against our actions and were named Great Place to Work in Spain. Attracting the best talent and developing and engaging our employees are critical to achieving and sustaining our business objectives and overall performance. Employee advancement is merit-based, based on performance as well as demonstration of core competencies which include our core values with an emphasis on ethics and integrity. We prioritise the development and promotion of our existing 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 robust career development plans. Talented employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences. Current programmes include our Chief Executive Officer (CEO) Forum – where small groups of high potential and emerging talent are given the opportunity to learn more about the business from the Company’s most senior leaders and to benefit from peer mentorship – and the annual Managing Director’s Meeting where country and regional commercial leaders begin the year in alignment with the Group’s strategy and goals. In addition, the Board reviews succession plans for key executive roles and succession plans are in place for critical positions across our business. Our performance management process ensures all employees set objectives which align to our overall business goals and have clear line-of-sight to how their individual contributions benefit the Company. Our performance management system assesses and rewards both performance and behaviour, in line with our Code of Conduct. All employees have a specific annual objective to adhere to the Code of Conduct and to complete training and certify their adherence to this Code.	Smith & Nephew strives to create a highly engaged and productive workforce. We foster this goal with targeted initiatives to ensure understanding of the Company’s mission and direction, encourage employee involvement, and ensure focus and adaptability to our customers and market place. We seek employee feedback via regular surveys and focus groups, and we act on this feedback in the spirit of continuous improvement. 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. Smith & Nephew has a Human Resource Global Standard for diversity and inclusion in the workplace and is committed to creating an inclusive environment that embraces and promotes diversity. 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 ten Board members are female. On 31 December 2014, Smith & Nephew had the following breakdown of employees:		We aim to provide an open, challenging, productive and participative environment based on constructive relationships. We maintain open and transparent communication with employees through regular and timely information and consultation. We clearly communicate our business goals and performance standards, and provide the training, information and authority needed to achieve them. We provide fair recognition and reward based on performance. Our annual CEO Award, open to all employees worldwide, recognises employees who deliver exceptional results in line with our core values, encouraging innovation and a spirit of continuous improvement at all levels. We are committed to working with employees to develop each individual’s talents, skills and abilities. We provide encouragement to learn and continuously improve. We recruit, employ and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We do not tolerate discrimination on any grounds and provide equal opportunity based on merit. We are committed to building diversity in a working environment where there is mutual trust and respect and where everyone feels responsible for the performance and reputation of our Company. We are committed to providing healthy and safe working conditions for all employees. We achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and we recognise employee involvement as a key part of that process. We do not use any form of forced, compulsory or child labour. We support the Universal Declaration of Human Rights of the United Nations. This means we respect the human rights, dignity and privacy of the individual and the right of employees to freedom of association, freedom of expression and the right to be heard.
	Number of Employees 1
	Board of    Directors
	Male	7
	Female	3
	Total	10
	Senior Managers and above2
	Male	562
	Female	168
	Total	730
	Total employees
	Male	8,485
	Female	5,757
	Total	14,242
	1   Number of employees as at 31 December 2014 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.

Smith & Nephew Annual report 201425

Overview In Advanced Surgical Devices (‘ASD’) we develop, manufacture and sell products in the areas of Orthopaedic Reconstruction, Trauma & Extremities, Sports Medicine Joint Repair, Arthroscopic Enabling Technologies, and others such as Gynaecology and Ear, Nose and Throat.	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 OXINIUMà Oxidized 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 highly cross-linked polyethylene lined cup have been shown in various national joint replacement registries to have displayed best in class survivorship rates when compared to implants made from any other materials. In Knee Implants, the LEGION Primary Knee with VERILAST Technology is the only knee implant that has been laboratory-tested to 30-years of simulated wear. While lab testing is not the same as clinical performance, the tests showed significant reduction in wear compared to conventional technologies. Knee Implants Smith & Nephew offers a range of products for specialised knee procedures. In 2014, Smith & Nephew launched the JOURNEY II Cruciate Retaining (‘CR’) knee implant extending the JOURNEY II Active Knee System to procedures that preserve the posterior cruciate ligament (‘PCL’) which account for approximately half of all knee replacement procedures. The LEGION/GENESISà 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 utilise 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 procedural steps and instruments used in the operating room. In 2014, Smith & Nephew entered into a commercial agreement with Blue Belt Technologies (‘BBT’), makers of the Navio® Orthopaedic Surgical System, the next generation of orthopaedic robotic surgical navigation. Under this agreement, surgeons using the Navio system will be able to implant Smith & Nephew’s JOURNEY UNI partial knee. We also announced an agreement with OrthoSensor, the leader in intelligent orthopaedics, that will enable surgeons to benefit from OrthoSensor’s VERASENSETM Sensor Assisted Surgery Technology for soft tissue balancing when implanting our JOURNEY II and LEGION Total Knee Systems. VERASENSE utilises advanced sensor technologies to enable evidence-based surgical decisions regarding component position, limb alignment and soft tissue balance to optimise outcomes in total knee replacement. Hip Implants For Hip Implants, core systems include the ANTHOLOGY Hip System, SYNERGYà Hip System, the SMFà Short Modular Femoral Hip System, the R3à Acetabular System, the POLARCUPà Dual Mobility Hip System and the SL-PLUSà Hip Family System. In 2014, we introduced the POLARSTEMà 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.

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STRATEGIC REPORT

Segment performance: Advanced Surgical Devices continued

For US patients, our successful VERILAST knee consumer campaign was expanded to include hips in 2014. Thanks to the combination of a well-established brand, a compelling call-to-action and our position as the first company to advertise differentiating technology to this audience, we were able to mirror the successes of our earlier knee campaigns by driving potential patients to our consumer-facing RediscoverYourGo website and its surgeon locator.   Trauma & Extremities   Our Trauma & Extremities franchises offer both internal and external fixation and tissue repair devices, as well as other products used in the stabilisation of severe fractures and deformity correction procedures.   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 orthopaedic surgeons including foot and ankle, hand and wrist, and trauma surgeons. For Trauma, the principal internal fixation products are the TRIGEN^à family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOT^à, and TRIGEN INTERTAN^à) and the PERI-LOC^à Plating System.   2014 saw the introduction of the D-RAD^à SMART PACK System for treating distal radius fractures. The new system – which includes complete, sterile, single-use instrument kits with implants, and a tray of sterile packaged fasteners and templates – allows hospital operating room staff to reduce the typical time and expense involved with reprocessing traditional plate and screw systems.   In wrist repair, we introduced a new solution for triangular fibrocartilage (‘TFCC’), a complex repair that leverages our FAST-FIX^à 360 technology and provides an all arthroscopic repair which eliminates knot stack.   Smith & Nephew also announced its entry into the forefoot market in 2014, with the launch of the HAT-TRICK Lesser Toe Repair System. Comprised of three separate repair options, the HAT-TRICK System includes products for metatarsophalangeal (‘MTP’) ligament repair and reconstruction, a metatarsal osteotomy guide, and a revisable, all-PEEK implant for Proximal Inter-Phalanges (‘PIP’) fusion, also known as hammer-toe correction. In hip repair, we introduced INTERTAN^à Gold instrumentation that is designed to streamline the surgical steps and improve clinical outcomes by offering a more efficiently designed set. In addition, the INTERTAN 10S was launched to meet the unique needs of smaller-stature patients by offering a more appropriate size for this population.   We launched the EVOS^à MINI Plating System for use in complex fractures of the long bones of the arms and legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed.   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.   Our global position within the Sports Medicine Joint Repair market was strengthened significantly in 2014, with the May acquisition of ArthroCare Corporation. The transaction adds technology and highly complementary products to our existing portfolio, including new shoulder anchor innovation.   In 2014, Smith & Nephew launched its SUTUREFIX^à Ultra soft suture anchor for hip and shoulder labral repair to surgeons in the US. The new anchor’s small, soft construct, and superior pull-out strength, allow surgeons to more precisely place fixation points around the joint to more accurately re-approximate the patient’s native anatomy.   2014 also saw the launch of the N8TIVE^à ACL (anterior cruciate ligament) System which helps surgeons create highly anatomic ACL Reconstructions. N8TIVE allows surgeons to restore the size, shape, and location of the native femoral and tibial ACL insertion points.   Arthroscopic Enabling Technologies (‘AET’)   Our Arthroscopic Enabling technologies franchise now includes the latest generation COBLATION^à radio frequency (‘RF’) technology acquired from ArthroCare, as well as electromechanical and mechanical blades and hand instruments for the removal of damaged tissue. Additionally, the franchise offers fluid management equipment for surgical access and high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation inside the joint. Key AET products include DYONICS shaver blades, ACUFEX^à handheld instruments, and a wide range of RF probes. The ArthroCare acquisition brought us the latest generation of RF technology – the internationally patented COBLATION technology – which offers ablation, resection, and coagulation of soft tissue and hemostasis of blood vessels. The DYONICS Platinum Series Shaver Blades are single-use blades that provide superior resection due to their sharpness and virtually eliminate clogging through their improved debris evacuation capabilities. The DYONICS PLAN Hip Impingement Planning System was launched in 2014. This interactive, 3D software system uses data from low-dose¹ CT scans to help surgeons visualise, assess and plan each patient’s unique Femoroacetabular Impingement (‘FAI’) surgery before they enter the operating room.   Other ASD   The Other ASD franchise includes smaller businesses such as Gynaecology and our newly acquired Ear, Nose and Throat (‘ENT’) business.   The main Gynaecology product is the TRUCLEAR^à System, a first-of-its-kind hysteroscopic tissue removal system, 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.   Our ENT business develops, manufactures, and markets products for the ENT market space. We offer a wide variety of products in this area including our COBLATION technology and our RAPIDRHINO^à carboxymethylcellulose (‘CMC’) technology which is featured in dissolvable nasal and sinus dressings, removable nasal and sinus dressings, and epistaxis treatment products.

1 Low-dose scan protocol reduces radiation by approximately 50% compared to standard CT protocol.

CT Protocol Report, HIPS. Document number 15001984, 2013. Data on file at Smith & Nephew.

28 Smith & Nephew Annual report 2014

VERILAST Technology for Hip Replacement The proprietary technology combines innovation with long-term performance.

Regulatory approvals   In 2014, regulatory clearances/approvals were obtained for several key products and instrumentations.   In the US, 510(k) clearances were given to the D-RAD^à SMART PACK, VLP^à MINI-MOD Plates and Screws, EVOS Mini-Fragment Plating System, JOURNEY II BCS Constrained Articular Inserts, BIOSURE HEALICOIL^à PK screw, Cannulated Captured Screw, N8TIVE ACL Anatomic Reconstruction System and NasaStent^à CMC Nasal Dressing. Additional 510(k) clearances were also granted for our VISIONAIRE software revisions as well as the Q-Fix^à Suture Anchor, the Multi-Fix^à S Knotless Fixations System and the Topaz^à EZ Microdebrider COBLATION Wand.   In Canada, approvals were granted for our LEGION Narrow OXINIUM and CoCr Femoral Components, HEALICOIL REGENESORB^à Suture Anchor, the SUTUREFIX^à ULTRA Suture Anchor, TFCC FAST-FIX Kit, TRUEPASS^à Suture Passer, DYONICS PLAN, ULTRATAPE^à, N8TIVE ACL Reconstruction System, BIOSURE HEALICOIL PK screw, KVac^à and Ambient KVac COBLATION Wands, Q-Fix Suture Anchor System and MediENT^à Turbinate Implant. In Australia, LEGION Narrow OXINIUM, HEALICOIL REGENESORB, LEGION Hinge Knee System, KVac COBLATION Wand, N8TIVE ACL Reconstruction System, SpeedLock^à Hip Knotless Fixation System, Multi-Fix S Knotless Fixation Device, Q-Fix Suture Anchor System, Ventera^à Sinus Dilation System and Serpent^à Articulating ENT Instrument were approved.   In Latin America, the Quantum^à 2 COBLATION System and the Magnum^à 2 Knotless Fixation Device were approved in Argentina; the Speedfix^à Suture System and the Titan^à Suture Anchor were approved in Brazil; and the RAPIDRHINO System was approved in Mexico.   In Europe, the following products obtained regulatory clearance: HEALICOIL REGENSORB Suture Anchor, VLP MINI-MOD Plates and Screws, the EVOS Mini-Fragments Plates and Screws, the LEGION Hinge Knee System and the JOURNEY II CR Knee System.   In Japan, the ANTHOLOGY HA Coated Hip stem, SMF^à Hip Stem, Osteoraptor^à OS Suture Anchor, HEALICOIL REGENESORB Suture Anchor, SUTUREFIX ULTRA Suture Anchor, TFCC^à FAST-FIX Kit, OSTEORAPTOR^à HA curved, TRUEPASS Suture Passer, DYONICS PLAN, and ULTRATAPE were all approved.   Other approvals include the Speedlock Hip Knotless Fixation System in Singapore and the ENT Irrigation Pump^à in Korea.

Smith & Nephew Annual report 201429

Overview 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 elderly 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 management of wound exudate, treatment and prevention of wound infections, negative pressure wound therapy (‘NPWT’) and bioactive therapies. The portfolio is grouped into disposable wound care products (Advanced Wound Care), electrical equipment for wound therapy (Advanced Wound Devices) and bioactives (Advanced Wound Bioactives). Advanced Wound Care Exudate management Exudate management products focus on effectively and efficiently managing wound fluid and creating an optimal healing environment to promote improved healing outcomes. Our key brands in this space are ALLEVYN foam dressings and DURAFIBERà gelling fibre dressings. In 2014, we continued to invest in the development and commercialisation of our flagship ALLEVYN brand, with significant sales and marketing efforts in key countries. The ALLEVYN brand is evolving towards ALLEVYN Life, our latest innovation in foam dressings, which was designed to provide a better patient experience, and greater wear time. This leads to improved patient outcomes and economic savings for payers, which has now been demonstrated in several studies.	We have also experienced a significant increase in the utilisation of ALLEVYN Life as a prophylactic measure to help prevent pressure ulcers, driven by the dressing’s unique multi-layer design which gives it superior pressure redistribution properties. Throughout 2014, we have continued to invest in customer insights and the generation of meaningful clinical and health economic evidence to ensure that our ALLEVYN portfolio is in a sustainable, category leading position and delivers to our customers’ expectations. Infection management AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT, DURAFIBER Ag and ALLEVYN Ag) and iodine (IODOSORBà). The iodine-based IODOSORB product has continued to gain interest due to the unique properties of the cadexomer iodine molecule and their impact on biofilms, which have become a well-recognised barrier to healing in wound care. IODOSORB benefits from one of the most comprehensive evidence bases in wound care. We are also experiencing strong interest in ACTICOAT, particularly in post-surgical wounds to prevent the complications associated with surgical site infection and in delayed healing chronic wounds. Other AWM offers a wide range of other wound care products, resulting in Smith & Nephew having 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. IV3000à: AWM’s specialist breathable premium IV dressing, utilising REALTICà film technology and unique patterned adhesive, continues to perform well, particularly driven by emerging markets. In 2014, the IV3000 range benefited from several product upgrades reinforcing its differentiation as a premium offering. Success in the emerging markets has created an opportunity for a mid-tier offering, which will be introduced in 2015. ALLEVYN Life An innovative multi-layered dressing designed for people living their everyday lives.

Smith & Nephew Annual report 201431

STRATEGIC REPORT

Segment performance: Advanced Wound Management continued

	OPSITE Post-Op Visible: This is our innovative dressing that combines the qualities of a premium dressing with the ability to see and monitor the incision. This unique product continues to deliver strong growth in both our Established Markets and Emerging & International Markets, supported by investment in clinical evidence. Advanced Wound Devices Advanced Wound Devices consists of two categories of products: NPWT and VERSAJETà. NPWT Our NPWT solutions include traditional NPWT products (RENASYS products) and the single-use portfolio (PICO and KALYPTOà products). We are also progressing with launch plans for our next-generation traditional NPWT product. During 2014, we were required to initiate a distribution hold in the US on RENASYS products as the FDA indicated new regulatory clearances were required in respect of certain design enhancements. We are working to obtain these and RENASYS remains available outside of the US. 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 the delivery of negative pressure, which benefits patients and caregivers alike.	VERSAJET The VERSAJET II Hydrosurgery system is a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wounds, burns and soft tissue injuries. Advanced Wound Bioactives Smith & Nephew is the global market share leader in the bioactives segment, which is the fastest growing category of wound therapeutics. Our diversified biotherapeutic portfolio offers differentiated, cost-effective solutions for tissue repair and healing, addressing the full spectrum of hard-to-heal wounds. Currently, our leading bioactive brand is Collagenase SANTYLà Ointment, the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns. In 2014, Smith & Nephew launched a new 90g package size to bring convenience and economy to providers and patients treating large dermal ulcers and burns with SANTYL. In addition, consistent with Smith & Nephew’s scientific leadership strategy, new clinical data highlighting the benefits of using SANTYL adjunctively with sharp debridement was released early in the year and was closely followed by initiation of a larger, follow-on study of similar design to corroborate the initial findings. REGRANEXà Gel is the first and only FDA approved recombinant platelet-derived growth factor indicated for use as an adjunct to good ulcer care in the treatment of lower extremity diabetic neuropathic ulcers. Physicians increased their prescribing of REGRANEX throughout the year, in part due to REGRANEX 360, a novel programme launched by Smith & Nephew to help patients maximise the benefits of the brand by informing about insurance coverage, shipping the medication directly to the patient’s home or office and providing expert consultation on how to use the brand appropriately.
	Collagenase SANTYL Ointment The only enzymatic debrider approved by the FDA for use in the US. It selectively removes necrotic tissue without harming surrounding healthy tissue.

32 Smith & Nephew Annual report 2014

OASIS^à, a family of naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds completes Smith & Nephew’s bioactive portfolio.

In October 2014, we announced the top-line results of the Phase 3 study of HP802-247, a living cell spray-on therapy designed to stimulate healing of venous leg ulcers. HP802-247 did not meet the primary endpoint in this trial and we have taken the decision to stop the Phase 3 programme. We remain committed to investing in developing pioneering Advanced Wound Bioactive treatments.

Regulatory approvals

In 2014, regulatory clearance was obtained for both ALLEVYN Life and DURAFIBER in Japan making the latest absorbent dressing technologies available to this important market.

PICO, our single use NPWT system was approved for the first time in Japan. In addition, a significant enhancement to the PICO product, in the form of the new Soft Port dressing and tubing set, was approved in the EU and Australia.

Other registration activities during the year include expanding the geographic footprint of established products within the emerging markets and the ongoing expansion of Smith & Nephew Medical (Suzhou) as a new supply site for multiple wound care products.

Smith & Nephew Annual report 201433

STRATEGIC REPORT

Financial review and principal risks

The Group finished 2014 set to

benefit from the actions and

investments we have made

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 execution of disposals.

2 Explanation of these non-GAAP financial measures are provided on pages 176 to 179.

34 Smith & Nephew Annual report 2014

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:

	2014       $ million	2013 $ million	Reported growth in revenue %		Constant currency exchange effect %		Acquisition/ Disposal effect %		Underlying growth in revenue %
Advanced Surgical Devices
US	1,558	1,391	12		–		(10	)	2
Other Established Markets	1,229	1,204	2		2		(4	)	–
Established Markets	2,787	2,595	7		1		(7	)	1
Emerging & International Markets	511	420	22		3		(8	)	17
Advanced Surgical Devices	3,298	3,015	9		1		(7	)	3
Advanced Wound Management
US	454	471	(4	)	–		–		(4	)
Other Established Markets	699	722	(3	)	(1	)	–		(2	)
Established Markets	1,153	1,193	(3	)	–		–		(3	)
Emerging & International Markets	166	143	16		3		(5	)	14
Advanced Wound Management	1,319	1,336	(1	)	1		(1	)	(1	)

Advanced Surgical Devices   Revenue   ASD revenue increased by $283 million (9% on a reported basis) from $3,015 million in 2013 to $3,298 million in 2014. The underlying increase of 3% is after adjusting for a 7% impact from the acquisition of ArthroCare Corp in May 2014 and a 1% unfavourable foreign currency translation.   In the US, revenue increased by $167 million to $1,558 million in 2014 from $1,391 million in 2013 (12% on a reported basis). The underlying increase of 2% is after adjusting 10% for the impact of the ArthroCare Corp acquisition in May 2014. In Other Established Markets, revenue was $1,229 million in 2014, an increase of $25 million from $1,204 million in 2013 (2% on a reported basis). The underlying increase was flat after adjusting for 2% from favourable foreign currency translation and the impact of 4% from acquisitions. Our Emerging & International Markets revenue increased by $91 million to $511 million in 2014 from $420 million in 2013 (22% increase on a reported basis). The underlying increase was 17% after adjusting for 3% for unfavourable foreign currency translation and the impact of 8% from acquisitions.   In the global Knee Implant franchise, revenue increased by $8 million from $865 million in 2013 to $873 million in 2014 (1% on a reported basis), representing a 2% underlying revenue increase 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 driven by sales of the JOURNEY II BCS Knee System.   Global revenue from the Hip Implant franchise increased by $1 million from $653 million in 2013 to $654 million in 2014 (flat on a reported basis), which represented an underlying revenue increase of 1% after 1% unfavourable foreign currency translation. Sales in our VERILAST Hip and direct anterior approach portfolio contributed to the increase.   Trauma & Extremities revenue increased by $20 million from $486 million in 2013 to $506 million in 2014 (4% on a reported basis), representing underlying revenue growth of 4% after adjusting for a 1% impact from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation.   Sports Medicine Joint Repair revenue increased by $80 million from $496 million in 2013 to $576 million in 2014 (16% on reported basis), representing underlying revenue growth of 8% after adjusting for a 8% impact from the acquisition of ArthroCare Corp, 1% from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation.   Global revenue from Arthroscopic Enabling technologies increased by $101 million from $441 million in 2013 to $542 million in 2014 (23% on a reported basis). This increase represents an underlying revenue increase of 1% after adjusting for the 22% impact from the acquisition of ArthroCare Corp, 1% from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation.   The revenue in the Other ASD (including Gynaecology and ENT) franchise increased by $73 million from $74 million in 2013 to $147 million in 2014 following the acquisition of ArthroCare Corp in 2014. Excluding the impact of this acquisition, underlying revenue in the Other ASD franchise, which includes gynaecology, grew by 10%.

Smith & Nephew Annual report 201435

STRATEGIC REPORT

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:			Trading and operating profit Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:
	2014  $ million	2013  $ million		2014 $ million	2013  $ million
Operating profit	626	620	Operating profit	123	190
Acquisition-related costs	107	7	Acquisition-related costs	11	24
Restructuring and rationalisation costs	33	44	Restructuring and rationalisation costs	28	14
Amortisation of acquisition intangibles and impairments	78	41	Amortisation of acquisition intangibles and impairments	51	47
Legal and other	(34)	–	Legal and other	32	–
Trading profit	810	712	Trading profit	245	275
Trading profit margin increased from 23.6% to 24.6%. Trading profit increased by $98 million to $810 million from $712 million in 2013. This increase reflects the benefits from our structural efficiency programme. Operating profit increased by $6 million from $620 million in 2013 to $626 million in 2014. This comprises the increase in trading profit of $98 million discussed above offset by increases in acquisition-related costs of $100 million and amortisation of acquisition intangibles of $37 million and partially offset by a decrease in restructuring and rationalisation costs of $11 million and credit relating to the US pension settlement and closure. Advanced Wound Management Revenue AWM revenue decreased by $17 million (-1% on a reported basis), from $1,336 million in 2013 to $1,319 million in 2014. The underlying decrease of 1% is after adjusting for an increase of 1% for acquisitions completed in the year and a 1% unfavourable foreign currency translation. In the US, revenue decreased by $17 million to $454 million in 2014 from $471 million in 2013 (-4% on a reported basis). The underlying decrease was also 4%. In Other Established Markets, revenue was $699 million in 2014, a decrease of $23 million from $722 million in 2013 (-3% on a reported basis). The underlying revenue decrease was 2% with 1% of unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $23 million in 2014 (16% on a reported basis). The underlying increase was 14% after adjusting 2% for unfavourable foreign currency translation. Advanced Wound Care revenue decreased by $38 million (-5% on a reported basis) to $805 million in 2014 from $849 million in 2013. The underlying decline of 4% is after adjusting for foreign currency translation. 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. Advance Wound Devices revenue decreased from $213 million in 2013 to $192 million in 2014, a reported decrease of $21 million and 10%. The underlying decrease of 9% is after adjusting for unfavourable foreign currency translations of 1%. This decline was due to the hold of RENASYS in the US due to regulatory issues and competitive pressures in traditional canister-based NPWT in Europe. Advanced Wound Bioactives revenue increase to $322 million in 2014 from $280 million in 2013 (15% reported growth). The underlying increase was also 15%.			Trading profit margin decreased from 20.6% to 18.6%. Trading profit decreased by $30 million to $245 million from $275 million in 2013. The decrease in the year is primarily attributable to the RENASYS hold. Operating profit decreased by $67 million from $190 million in 2013 to $123 million in 2014. This comprises of the decrease in trading profit of $30 million discussed above, costs relating to the hold on RENASYS and cessation of the HP802 trials amounting $52 million, offset by a decrease in acquisition-related costs of $13 million, due to the integration of the Healthpoint acquisition which completed in December 2012, an increase in restructuring and rationalisation costs of $14 million and an increase of $4 million in amortisation of acquisition intangibles. 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. Additional detail is set forth under Risk Factors in the Group information section of this report. 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.

36 Smith & Nephew Annual report 2014

Product Portfolio Development The medical devices industry has a rapid rate of new product introduction. The Group must be adept at monitoring the landscape for technological advances, have an efficient and valuable product development pipeline and secure protection for its intellectual property. The Group may also seek to acquire businesses as part our business strategy to augment the product portfolio or business scale in a certain geography.
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 receive regulatory approval to successfully commercialise a pipeline product	–  Processes focused on identifying new products and potential disruptive technologies (internal and external) –  Improved productivity, prioritisation and allocation of R&D funds –  Increasing R&D investment to enhance clinical capability and invest in biomaterials –  Strengthen intellectual property rights and monitor and defend against infringement –  Global strategic marketing programmes –  Support an Emerging & International Market product portfolio	–  Loss of market share, profit and long-term growth Link to Strategic Priority Innovate for value Established Markets Emerging & International Markets Supplement organic growth through acquisitions

Acquisitions and Business Development The Group may seek to acquire businesses or products as part of our strategy to augment the product portfolio or generate business scale in certain geographies. These acquisitions must deliver the expected returns and not create significant liability exposures or the Group may not meet its financial targets.
Specific risks we may face	Risk management actions	Possible impacts
–  Ineffective acquisition due diligence –  Inflated forecasts or projections may cause over-valuation of transaction –  Lack of timely adoption of Group standards policies and financial controls during integration could create additional liabilities –  Acquisitions in emerging markets may identify practices that must be ceased to meet Group standards	–  Strong resources and processes to ensure rigorous review and integration of acquisitions or product related investments –  Mergers & Acquisitions Council consisting of senior executives that reviews acquisitions and business development transactions –  Board of Directors review of all significant transactions –  Detailed compliance due diligence and integration reporting processes –  Robust Internal Audit and Group Finance Controls –  Post acquisition review programme	–  Loss of market share, profit and long-term growth Link to Strategic Priority Emerging & International Markets Supplement organic growth through acquisitions Established Markets

Smith & Nephew Annual report 201437

STRATEGIC REPORT

Financial review and principal risks continued

Government Action, 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, Costa Rica, 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 –  Lack of compelling health economics data to support reimbursement requests –  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	–  Develop innovative economic product and service solutions for both Established and Emerging & International markets (‘Syncera’) –  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 Cost of Goods Sold, Stock Keeping Units and inventory management –  The Group transacts 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 Simplify and improve our operating model Established Markets Emerging & International Markets

Business Operations and Business Continuity 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. The Group manages a large product portfolio and a large product inventory. Sales and operation planning and supply chain management must ensure the products needed are available at the right place and time. In a fast changing, complex, global business, high performing talent in key positions is a business critical requirement.
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 –  Over-production of product inventory and instrument sets may occur due to inadequate portfolio planning –  Poor retention of high performing and high potential staff could jeopardise achieving objectives	–  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 –  Enhanced travel security and protection programme –  IT disaster and data recovery plans in place to support overall business continuity plans –  Mobile device and cyber security protection plan –  Improved sales and operations processes and inventory management with dedicated teams and key performance indicators –  Robust talent systems and processes with focus on identifying key roles and successors	–  Loss of revenue, profit and cash flows Link to Strategic Priority Simplify and improve our operating model Established Markets Emerging & International Markets

38 Smith & Nephew Annual report 2014

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 result in product deficiencies –  Failure to implement programmes and supporting resources to ensure product quality and regulatory compliance –  Failure to manage, process and analyse customer complaints and adverse event data	–  Global QARA organisation to create a single Quality Management System –  Standardised Group quality management and practice –  Monitoring and auditing programmes to assure compliance –  Group-wide product complaint and registration systems –  Group-wide practices to drive design, and production line performance and dependability –  Design for manufacture in product development –  Post launch review of product safety and complaint data	–  Loss of revenue, profit and reduction in share price –  Negative impact on brand/ reputation Link to Strategic Priority Simplify and improve our operating model Established Markets Emerging & International Markets

Compliance with Laws and Ethical Behaviour Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many countries is towards increased enforcement activity for bribery and corruption. The Group is also subject to increased scrutiny under US healthcare laws (e.g. False Claims Act) and in the EU for data protection. Acquisitions and expansion into emerging markets may require additional compliance controls.
Specific risks we face	Risk management actions	Possible impacts
–  Violation of anti-corruption, healthcare, or data privacy laws could result in fines, loss of reimbursement and harm reputation –  Cultures in certain geographies and in acquired businesses may not fully support the Group value to Earn Trust –  Rapid growth in Emerging & International Markets with increasing numbers of distributors –  Third parties retained by the Group may be involved in improper activities which result in penalties or loss of reputation. –  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 Board and Executive oversight bodies supported by a global Office of Ethics & Compliance –  Code of Conduct/Global Policies and Procedures (‘GPPs’) providing guidelines for ethical behaviour and controls for significant compliance risks –  Training and e-resources to guide employees and third parties with ethical and compliance responsibilities –  Monitoring and auditing programmes to verify implementation –  Minimum acceptable financial procedures adopted by all businesses wholly owned by the Group –  Independent reporting channels for employees and third parties to report concerns with confidentiality –  Robust investigation procedures to ensure adequate reviews and documentation with significant issues escalated to and monitored by legal and compliance heads –  Controls for significant interactions with Health Care Professionals and Government Officials –  Higher risk third parties including distributors and agents subject to screening, compliance requirements, training and oversight processes –  Due diligence reviews and integration plans and reporting for acquisitions –  Risk assessments to determine resources and controls for higher risk markets	–  Loss of profit and reduction in share price –  Negative impact on brand/ reputation Link to Strategic Priority Simplify and improve our operating model Emerging & International Markets Established Markets

Smith & Nephew Annual report 201439

STRATEGIC REPORT

Sustainability

Protecting the future

We care about our customers and helping improve people’s lives. We also care about the people who work for us, the environment in which we operate and the societies in which we do business. Addressing unmet social need with more affordable products gathered pace in 2014 with the introduction of our Syncera range and further growth and consolidation of our mid-tier products. As part of our commitment to build trust we increased our engagement with suppliers to increase assurance around compliance and ethics.   This is a summary of our sustainability activities and progress in 2014. Our Sustainability Report will be published in April 2015.   In 2014, there were no employee or contractor fatalities and our Lost Time Injury Frequency Rate (‘LTIFR’) fell again for the fourth successive year, this time by 20%. Compared to the previous year, total waste increased by 13%, however waste disposed to landfill fell by 19% as we found new ways to recycle.   Energy consumption has increased by 9% since 2011. However, after adjusting for the transient effect of transferring some production to China and the impact of newly acquired businesses, there was a net fall in energy consumption of 2%.   After three consecutive years of increases, water consumption reduced by 7% in 2014 compared to the previous year.   As part of the Great Place to Work strategy, substantially more of our employees enjoyed the benefits of wellness programmes.   We donated approximately $9 million in philanthropic activities, of which $2 million was in product donations and charitable gifts. Volunteering programmes were active in most of the territories where we work and the benefits to society and the level of employee involvement continued to increase.   Safety     The continuous improvement in safety performance is underpinned by committed leadership and a sharp focus on managing risks. Making health and safety a priority for all of our employees and contractors was an imperative in 2014. This was supported by the progressive rollout of our integrated management system and the wide introduction of behavioural based safety programmes.

40 Smith & Nephew Annual report 2014

Water

Reducing water consumption continued to be a challenge in 2014, however there was a reduction of 7% achieved as a result of a breakthrough in water consumption at our Memphis manufacturing facility where 66% of Smith & Nephew’s water is consumed.

Waste

The annual increase of 13% in total waste was offset by moving landfill waste to recycling or energy recovery. A transient increase created by commissioning new capacity in China and the one-off event of disposing of waste arising from the Hull flood increased the total waste by 8%. In 2014, we carried out a thorough waste audit in order to implement more initiatives to manage and reduce our waste.

Energy and CO₂

The energy increase of 15.2 GWh (9%) since 2011 has been dominated by the transient impact of commissioning new manufacturing capacity in China accounting for 10 GWh whilst continuing production in the UK. The effect of recently acquired businesses accounted for 8.7GWh of the increase.

The underlying reduction of 3.5 GWh (2%) reflects the implementation of efficiency improvements in our manufacturing facilities.

Transferring manufacturing to China from the UK and acquiring capacity in India has resulted in higher emissions factors and increased CO₂ emissions.

Greenhouse gases

Methodology, materiality and scope

The data reported relates to areas of largest environmental impact including manufacturing sites, warehouses, research and offices. Smaller locations representing less than 2% of our overall emissions are not included. Acquisitions completed before 2014 are included in the data.

All emissions fall within the scope of our consolidated financial statement and we have used the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition) as guidance for this process. Primary data from energy suppliers has been used wherever possible. The Biotherapeutics and the Sushrut Adler acquisitions are included in the data for 2014 for the first time. Data from the ArthroCare acquisition is excluded and 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. The emissions from all years have been recalculated using the most up-to-date factors available in 2014. Fugitive emissions are included from the manufacturing and research locations and arise from the losses of refrigerant gases.

	2014	2013
CO2e Emissions (tonnes) from:
Direct emissions	11,213	10,152
Indirect emissions	74,797	68,795
Total	86,010	78,947
Intensity ratio
CO2e (t) per $m revenue*	19.5	19.4
CO2e (t) per full-time employee*	6.9	7.5

Revenue data: 2014 – $4.4 billion, 2013 – $4.1 billion

Full-time employee data: 2014 – 12,437, 2013 – 10,520

* Notes: 2013 data adjusted to exclude Healthpoint (Biotherapeutics) and 2014 data adjusted to exclude ArthroCare.

By order of the Board, 25 February 2015

Susan Swabey

Company Secretary

Smith & Nephew Annual report 201441

At the top of

their game

Sports Medicine is the treatment of injuries to the soft tissues through keyhole surgery – typically ligaments, tendons and cartilage in the joints. These injuries can affect anyone, not just athletes. Sports Medicine helps patients recover function as well as minimise disability and recovery time. Smith & Nephew is a global leader in Sports Medicine. In 2014, nearly a quarter of our revenue came from this area, and our Joint Repair business delivered revenue growth of 8%. It is a $4.6 billion global market, and a strong area of focus and opportunity for Smith & Nephew.	We expect to see long-term global growth driven by delivering both clinical benefits and strong health economics. Repairing injuries today prevents them becoming more debilitating as patients get older, which reduces future demands on healthcare systems. In the emerging markets we are helping to widen access to these advanced treatments through delivering medical education. Sports Medicine is a great place to innovate. We are investing more in R&D to improve existing treatments, and to develop new instrumentation to enable surgeons to better treat their patients.

44 Smith & Nephew Annual report 2014

24%	$5bn
Nearly a quarter of Smith & Nephew revenue	Global Sports Medicine market with Smith & Nephew
came from Sports Medicine in 2014	having 24% market share in 2014 (see page 20)

Smith & Nephew Annual report 201445

Better by

design

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 drive our new product development programmes. In 2014, we launched a number of exciting new products, expanding our portfolios in our Established Markets and Emerging & International Markets. We also invested $235 million in R&D in 2014, over 5% of revenue, and have a strong pipeline of innovation to come. Our experts in Europe, US, China and India keep us close to our customers and ensure our programmes target unmet clinical needs, have strong financials and are technologically feasible. They also work closely with manufacturing to ensure we can produce new products to clinical, cost and time specifications.	JOURNEY II The JOURNEY II Cruciate Retaining (CR) knee replacement extends the JOURNEY II Total Knee System to procedures that preserve the posterior cruciate ligament (PCL), which accounts for approximately half of all knee replacement procedures. The JOURNEY II CR knee, like the JOURNEY II Bi-cruciate Stabilized (BCS) knee that was launched last year, sets a new standard in knee implant performance by restoring more normal motion for patients.
	HAT-TRICK The HAT-TRICK Lesser Toe Repair System is our entry into the high-growth forefoot market, where we believe there are significant opportunities for us to enhance the surgeon experience, simplify the procedures and, most importantly, improve patient outcomes.
	EVOS EVOS MINI Plating System for use in complex fractures of the long bones of the arms and legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed.
	PICO PICO, Smith & Nephew’s disposable, canister-free Negative Pressure Wound Therapy system has been named Most Innovative Product 2014 at The Irish Medical and Surgical Trade Association Awards. The award was judged by a panel of top clinicians, health service executives and medical companies.

46 Smith & Nephew Annual report 2014

Realising

potential

The ability to attract and retain talented employees is essential to achieving our business goals. This is why one of our strategic imperatives is to be recognised as, a great place to work. For Smith & Nephew, being a great place to work means having a workplace where employees are proud and excited to come each day because they are doing work that makes a difference for customers and patients. It is a place where employees are valued for their performance and achievements, and a place that values trust above all else. To qualify as a Great Place to Work, a company must complete the Great Place to Work Trust Index survey and its management must participate in a Culture Audit. Both evaluate the company’s performance on key dimensions of engagement: Credibility, Respect, Fairness, Pride and Camaraderie.	We aim to provide an open, challenging, productive, diverse, healthy, safe and participative environment based on constructive relationships.
	Diverse 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. Diversity & Inclusion continues to be a key focus for us and we have a Global Steering team sponsored by the CEO with local councils established across the business. 30% of our Board of Directors and 23% of senior managers are female.
	Healthy We strongly believe we perform better when our employees are healthy, motivated and focused. The support we provide our employees when they experience a health concern is a critical factor in how well and how quickly they are able to get back to peak. During 2014, Smith & Nephew signed up to the UK’s Time to Change programme, showing our employees being open about mental health concerns will lead to support, not discrimination, and embarked on a global wellness initiative to support all employees.
	Safe We are committed to providing healthy and safe working conditions for all employees. We achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and we recognise employee involvement as a key part of that process. During 2014, we reduced the lost time injury frequency by 20%, reflecting a sharp focus of leadership on identifying and managing workplace risk.
14,000
Our employees support healthcare professionals in more than 100 countries
23%
of our senior managers are female

52 Smith & Nephew Annual report 2014

CORPORATE GOVERNANCE

Our Board of Directors

Roberto Quarta (65)	Olivier Bohuon (56)	Julie Brown (52)
Chairman	Chief Executive Officer	Chief Financial Officer
Joined the Board in December 2013 and appointed Chairman following election by shareholders on 10 April 2014. He was also appointed Chairman of the Nomination & Governance Committee and a Member of the Remuneration Committee on that day. Career and Experience Roberto is a graduate and a former Trustee of the College of the Holy Cross, Worcester (MA), US. He started his career as a manager trainee at David Gessner Ltd, before moving on to Worcester Controls Corporation and then BTR plc, where he was a divisional Chief Executive. Between 1985 and 1989 he was Executive Vice President of Hitchiner Manufacturing Co. Inc., where he helped the company to expand internationally. He returned to BTR plc in 1989 as Divisional Chief Executive, where he led the expansion in North America and was appointed to the main board. From here he moved to BBA Aviation plc, as CEO from 1993 to 2001 and then as Chairman, until 2007. He has held several board positions, including Non-executive Director of Powergen plc, Equant N.V., BAE Systems plc and Foster Wheeler AG. His previous Chairmanships include Italtel Group S.p.A. and Rexel S.A. He is currently Chairman Designate of WPP plc, and will shortly retire as Chairman of IMI plc, the global engineering group as soon as a suitable replacement is appointed. He is a partner at Clayton, Dubilier & Rice and he is a member of the Investment Committee of Fondo Strategico Italiano Spa. Skills and Competencies Roberto’s career in private equity brings valuable experience to the Board, particularly when evaluating acquisitions and new business opportunities. He has an in-depth understanding of differing global governance requirements having served as a director and Chairman of a number of UK and international companies. Since his appointment as Chairman in April 2014, he has conducted a comprehensive review into the composition of the Board, and conducted the search for new Non-executive Directors resulting in the appointment of Vinita Bali and Erik Engstrom. Nationality   American/Italian	Joined the Board and was appointed Chief Executive Officer in April 2011. He is a Member of the Nomination & Governance Committee. Career and Experience Olivier has had a highly successful career in the pharmaceutical industry. He holds a doctorate from the University of Paris and an MBA from HEC, Paris. His career has been truly global. He started his career in Morocco with Roussel Uclaf and then, with the same company, held a number of positions in the Middle East with increasing levels of responsibility. He joined Abbott in Chicago as head of their anti-infective franchise with Abbott International, before becoming Pharmaceutical General Manager in Spain. He subsequently spent 10 years with GlaxoSmithKline, rising to Senior Vice President & Director for European Commercial Operations. He then re-joined Abbott as President for Europe, became President of Abbott International (all countries outside of the US), and then President of their Pharmaceutical Division, which was a $20 billion business, encompassing manufacturing, R&D and commercial operations. He joined Smith & Nephew from Pierre Fabre, where he was Chief Executive. Skills and Competencies Olivier has extensive international healthcare leadership experience within a number of significant pharmaceutical and healthcare companies. His global experience provides the skillset required to innovate a FTSE100 company with a deep heritage and provide inspiring leadership. He is a Non-executive Director of Virbac group. Nationality   French	Joined the Board as Chief Financial Officer in February 2013. Career and Experience Julie is a graduate, Chartered Accountant and Fellow of the Institute of Taxation. She trained with KPMG before working at AstraZeneca PLC, where she served as Vice President Group Finance, and ultimately, as Interim Chief Financial Officer. Prior to that she was Regional Vice President Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D Chief Financial Officer. In both Julie’s country and regional roles, trading margins increased significantly, improving the efficiency and profitability of the business. Her experience encompasses many areas of the healthcare value chain including Commercial, Operations, R&D and Business Development. She has led multi-billion dollar cost saving and restructuring programmes in Operations, R&D and the Commercial organisations and led major refinancing programmes, including the issuance of $2 billion US bonds. Julie has so far in her career, fulfilled two Non-executive Directorships with the NHS in the UK and the Board of the British Embassy. Skills and Competencies Julie has deep financial expertise and understanding of the healthcare sector, which has enabled her to lead a major transformation project at Smith & Nephew designed to simplify and improve the organisation and deliver margin accretion. She is a recognised leader with a proven ability to build teams. Her commercial experience in Latin America is of particular benefit as we continue to grow in emerging markets. She has held a number of senior commercial roles as well as financial positions, making her a versatile Chief Financial Officer. Nationality   British

54 Smith & Nephew Annual report 2014

Vinita Bali (59) Independent Non-executive Director	Ian Barlow (63) Independent Non-executive Director	The Rt. Hon Baroness Virginia Bottomley of Nettlestone DL (66) Independent Non-executive Director Appointed Independent Non-executive Director in April 2012. She is a Member of the Remuneration Committee and joined the Nomination & Governance Committee on 10 April 2014.
Appointed Independent Non-executive Director on 1 December 2014. She will join the Remuneration and Ethics & Compliance Committees on 1 April 2015.	Appointed Independent Non-executive Director in March 2010 and Chairman of the Audit Committee in May 2010. He was appointed a Member of the Ethics & Compliance Committee on 2 October 2014.
Career and Experience Vinita holds an MBA from the Jamnalal Bajaj Institute of Management Studies, University of Bombay and a bachelor’s degree in economics from the University of Delhi. She commenced her career in India with the Tata group, and then joined Cadbury India, subsequently working with Cadbury Schweppes plc in the UK, Nigeria and South Africa. From 1994, she held a number of senior global positions in marketing and general management at The Coca-Cola Company based in the US and South America, becoming President of the Andean Division in 1999 and Vice President, Corporate Strategy in 2001. In 2003, she joined the consultancy, Zyman Group as Managing Principal, again based in the US. Until recently, Vinita was Managing Director and Chief Executive Officer of Britannia Industries Ltd, a leading Indian publicly listed food company. Currently, Vinita is a Non-executive Director of Syngenta AG, Titan Company Ltd and CRISIL (Credit Rating Information Services of India) Ltd. She is also a board member of GAIN (Global Alliance for Improved Nutrition). Skills and Competencies Vinita has an impressive track record of achievement with blue-chip global corporations in multiple geographies including India, Africa, South America, the US and UK, all key markets for Smith & Nephew. Additionally, her strong appreciation of customer service and marketing brings deep insight to the Company as we continue to develop innovative ways to serve our markets and grow our business. Nationality   Indian	Career and Experience Ian is a Chartered Accountant with considerable financial experience both internationally and in the UK. He was a Partner at KPMG, latterly Senior Partner, London, until 2008. At KPMG, he was Head of UK tax and legal operations, and acted as Lead Partner for many large international organisations operating extensively in North America, Europe and Asia. Ian’s previous appointments include Non-executive Director and Chairman of the Audit Committee of PA Consulting Group and Non-executive Director of Candy & Candy. He was Chairman of WSP Group plc and of Think London, the inward investment agency. He is currently 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 Business Council and Chairman of The Racecourse Association. Skills and Competencies Ian’s longstanding financial and auditing career and extensive board experience add value to his role as Chairman of the Audit Committee. It was of particular benefit when leading the selection process for the new external auditor in 2014. His appointment as an additional member of the Ethics & Compliance Committee recognises the close links between the activities and oversight role of both committees. His work for a number of international companies gives added insight when reviewing our global businesses. Nationality   British	Career and Experience Virginia gained her MSc in Social Administration from the London School of Economics and Political Science following her first degree. 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 Culture, Media and Sport. Virginia was formerly a director of Bupa and Akzo Nobel NV. She is currently a director of International Resources Group Limited, member of the International Advisory Council 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 and Trustee of The Economist Newspaper. Skills and Competencies Virginia’s extensive experience within government, particularly as Secretary of State for Health brings a unique insight into the healthcare system both in the UK and globally, whilst her experience on the Board of Bupa brings an understanding of the private healthcare sector and an insight into the needs of our customers. Her long association with Hull, the home of many of our UK employees also brings an added perspective. Nationality   British

Smith & Nephew Annual report 201455

CORPORATE GOVERNANCE

Our Board of Directors continued

Erik Engstrom (51)	Michael Friedman (71)	Brian Larcombe (61)
Independent Non-executive Director	Independent Non-executive Director	Independent Non-executive Director
Appointed Independent Non-executive Director on 1 January 2015 and Member of the Audit Committee. Career and Experience Erik is a graduate of the Stockholm School of Economics (BSc) and of the Royal Institute of Technology in Stockholm (MSc). In 1986, he was awarded a Fulbright scholarship to Harvard Business School, from where he graduated with an MBA in 1988. Erik commenced his career at McKinsey & Co. and then worked in publishing, latterly as President and Chief Operating Officer of Random House, Inc. and as President and Chief Executive Officer at Bantam Doubleday Dell, North America. In 2001, he moved on to be a partner at General Atlantic Partners, a private equity investment firm focusing on information technology, internet and telecommunications businesses. Between 2004 and 2009, he was Chief Executive of Elsevier, the division specialising in scientific and medical information and then from 2009 Chief Executive of Reed Elsevier. Skills and Competencies Erik has successfully reshaped Reed Elsevier’s business in terms of portfolio and geographies. He brings a deep understanding of how technology can be used to transform a business and insight into the development of new commercial models that deliver attractive economics. Nationality   Swedish	Appointed Independent Non-executive Director in April 2013. He was appointed Chairman of the Ethics & Compliance Committee on 1 August 2014. Career and Experience Michael graduated with a Bachelor of Arts degree, magna cum laude from Tulane University and a Doctorate in Medicine from the University of Texas. He completed postdoctoral training at Stanford University and the National Cancer Institute, and is board certified in Internal Medicine and Medical Oncology. In 1983, he joined the Division of Cancer Treatment at the National Cancer Institute and went on to become the Associate Director of the Cancer Therapy Evaluation Program. Michael was most recently Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California. He also served as Director of the institution’s 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 also Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration (FDA). He has served on a number of boards in a non-executive capacity, including Rite Aid Corporation. Currently, Michael is a Non-executive Director of Celgene Corporation and Non-executive Director of MannKind Corporation. Skills and Competencies Michael understands the fundamental importance of research, which is part of Smith & Nephew’s value creation process. His varied career in both the public and private healthcare sector has given him a deep insight and a highly respected career. In particular his work with the FDA and knowledge relating to US compliance provides the skillset required to Chair the Ethics & Compliance Committee and resulted in a smooth handover during 2014. Nationality   American	Appointed Independent Non-executive Director in March 2002, Member of the Audit Committee, Nomination & Governance Committee and Remuneration Committee, and appointed Senior Independent Director on 10 April 2014. Career and Experience Brian graduated with a Bachelor of Commerce degree from Birmingham University. He spent most of 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 has held a number of Non-executive Directorships. He is currently Non-executive Director of gategroup Holding AG and Non-executive Director of Kodak Alaris Holdings Limited. Skills and Competencies Brian’s experience in private equity is particularly useful to us when evaluating acquisitions and new business opportunities. His long service as a Non-executive Director has provided continuity throughout a period of change and his corporate memory and wise counsel continues to support our new Chairman. As Senior Independent Director and member of the Nomination & Governance Committee, he plays an active role in succession planning and the search for new Non-executive Directors. In 2014, he led an insightful review into the effectiveness of the Board. Nationality   British

56 Smith & Nephew Annual report 2014

Joseph Papa (59)	Susan Swabey (53)
Independent Non-executive Director	Company Secretary
Appointed Independent Non-executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011, Member of the Audit Committee and Ethics & Compliance Committee. Career and Experience Joe graduated with a Bachelor of Science degree in Pharmacy from the University of Connecticut and Master of Business Administration from Northwestern University’s Kellogg School of Management. In 2012, he received an Honorary Doctor of Science degree from the University of Connecticut School of Pharmacy. He began his commercial career at Novartis International AG as an Assistant Product Manager and eventually rose to Vice President, Marketing, having held senior positions in both Switzerland and the US. He moved on to hold senior positions at Searle Pharmaceuticals and was later President & Chief Operating Officer of DuPont Pharmaceuticals and then Watson Pharma Inc. Between 2004 and 2006, he was Chairman and Chief Executive Officer of the Pharmaceutical Technologies Services Segment of Cardinal Health, Inc. Joe is currently Chairman and Chief Executive of Perrigo Company plc, one of the largest over-the-counter pharmaceutical companies in the US. Skills and Competencies With over 30 years’ experience in the global pharmaceutical industry, Joe brings deep insight into the wider global healthcare industry and the regulatory environment. As Chairman and Chief Executive of a significant US Company, Joe has a comprehensive understanding both of how to attract and retain global talent and use remuneration arrangements that incentivise performance, leading to maximum returns for investors. Nationality   American	Appointed Company Secretary in May 2009. Skills and Experience 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 joint Vice-Chair of the GC100 Group, a member of the CBI Companies Committee and is a frequent speaker on corporate governance and related matters. She is also a trustee of ShareGift, the share donation charity. Nationality   British

Smith & Nephew Annual report 201457

CORPORATE GOVERNANCE

Our Executive Officers

Olivier Bohuon is supported in the day-to-day management of the Group by a strong team of Executive Officers:
	Julie Brown (52)	Rodrigo Bianchi (55)
	Chief Financial Officer	President, IRAMEA
	Joined the Board as Chief Financial Officer in February 2013. Julie is a graduate, Chartered Accountant and Fellow of the Institute of Taxation. She is based in London. Skills and Competencies Julie’s experience in the healthcare sector includes 25 years with AstraZeneca PLC in progressively senior roles and four years with KPMG. Most recently, she served as Interim Chief Financial Officer of AstraZeneca. She has international experience and a deep understanding of the healthcare sector gained through her previously held Vice President Finance positions in all areas of the healthcare value chain including Commercial, Operations, R&D and Business Development. Julie has also led commercial organisations, being Country President and Regional Vice President in AstraZeneca. Nationality   British	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. Skills and 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 the 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
	Helen Maye (55)	Diogo Moreira-Rato (53)
	Chief Human Resources Officer	President, Europe and Canada
	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. Skills and 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	Joined Smith & Nephew in May 2014 with responsibility for leading all of our commercial business in Europe and Canada. He is based in Baar, Switzerland. Skills and Experience Diogo’s experience in the healthcare industry includes 31 years with Johnson & Johnson in progressively senior roles. Most recently, Diogo was President, DePuy Synthes, EMEA, where he led the merger and integration of DePuy and Synthes in EMEA. Prior roles included International Vice President for the Medical Devices and Diagnostics business, President DePuy Orthopaedics and Managing Director of Portugal. Nationality   Portuguese

58 Smith & Nephew Annual report 2014

Jack Campo (60)	Michael Frazzette (53)	Gordon Howe (52)
Chief Legal Officer	President, Advanced Surgical Devices	President, Global Operations
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. Skills and 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	Joined Smith & Nephew in July 2006 as President of the Endoscopy business. Since July 2011, he has headed up the Advanced Surgical Devices Division and is responsible for the Orthopaedic Reconstruction, Trauma and Endoscopy business units. Since 2014 he is also responsible for all of our commercial business in Latin America. He is based in Andover, Massachusetts. Skills and Experience Mike has held a number of senior positions within the US medical devices industry. He was Chief Executive Officer of Micro Group, a privately held manufacturer of medical devices. Prior to that, he spent 15 years at Tyco Healthcare in various leadership roles including President of the Patient Care Division, Health Systems, and Tyco Healthcare Group Canada. Nationality   American	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. Skills and 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
Cyrille Petit (44)	Glenn Warner (52)
Chief Corporate Development Officer	President, Advanced Wound Management
Joined Smith & Nephew in 2012 and leads the Corporate Development function. He is based in London. Skills and 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	Joined Smith & Nephew in June 2014 with responsibility for Advanced Wound Management’s global franchise strategy, marketing and produce development, as well as its US commercial business. Skills and Experience Glenn has a broad-based background in pharmaceuticals and medical products including extensive international experience, having served most recently as AbbVie Vice President and Corporate Officer, Strategic Initiatives, where he was responsible for the development and execution of pipeline and asset management strategies. Prior to that he was President and Officer, Japan Commercial Operations in Abbott’s international pharmaceutical business and Executive Vice President, TAP Pharmaceutical Products, Inc. Additional senior level roles included international positions in Germany and Singapore for Abbott’s Diagnostics business. Nationality   American

Smith & Nephew Annual report 201459

CORPORATE GOVERNANCE

Chairman’s letter

Good Governance lies at the heart of a well-run Company

Dear Shareholder,

I am delighted to present my first Corporate Governance Statement as your Chairman following my appointment at the Annual General Meeting in April 2014. I feel very strongly that good corporate governance lies at the heart of a well-run company. Openness and transparency, accountability and responsibility should run through everything that we do, both as a Board and throughout the business as a whole. The Board and I aim to set the tone at the top which should pervade throughout the rest of the organisation.

Later in this statement, as well as all the standard corporate governance disclosures we are required to make, you will find reports from Ian Barlow, Michael Friedman, myself and Joseph Papa, the Chairmen of our Board Committees on the activities of those committees throughout the year. These reports will explain to you where we have focused our work in 2014. Firstly, however I should like to explain the key issues that we, as a Board, have been handling:

Board succession planning

As mentioned in my letter on page 5, Sir John Buchanan, Richard De Schutter, Ajay Piramal and Pamela Kirby all retired from the Board during 2014. One of my first tasks in assuming the role of Chairman therefore was to refresh the Board to take the Company into our next stage of development. The report from the Nomination & Governance Committee on page 70 discusses the process we followed to identify the gaps in Board skills and experiences left by the departing directors and to commence the search for our new Non-executive Directors, Vinita Bali, who joined the Board on 1 December 2014, and Erik Engstrom, who joined us on 1 January 2015. I believe that we have a well-balanced Board with the skills we need for the future and I welcome our new Board members. This, however, is an ongoing process and we shall keep the Board composition under constant review in the years ahead, making changes where necessary to adapt to the changing needs of the Company.

Mergers and acquisitions

Following the successful acquisition of our Biotherapeutics business in 2012, we continued to make further acquisitions throughout 2013 of the Adler business in India, two distributorships in Brazil and one in Turkey. In January 2014, we announced the acquisition of ArthroCare Corporation and this deal completed in May. You will read elsewhere in this Annual Report about the successful integration of ArthroCare into our Company. We also undertook post acquisition reviews of the transaction and earlier acquisitions to monitor actual performance against expected performance at the time of acquisition and we continued to review and evaluate other potential acquisitions for the future to support our Strategic Priorities.

Succession planning below Board level

We believe that succession planning below Board level is crucially important for the long-term future of the Company. In October, the Board therefore reviewed management succession plans both for the Executive Board members and also for their direct reports. We recognised that whilst there were some gaps, there were also plans in place to address these gaps and develop the next tier of management to become Board-ready in the medium-term. The Board also takes the opportunity to meet with local management teams when undertaking site visits and senior executives below Board level frequently present to the Board and its Committees. This helps us to get to know executives who could well become Board members in the future.

Understanding the business more deeply

Corporate governance does not exist in isolation and cannot be reduced to compliance with checklists and codes. In order for the Board to be able to review strategy, to determine our approach to risk and to respond to events, we need to have a thorough understanding of the business in which we operate.

During the year, the Board received a number of presentations from the businesses covering corporate development activity, the ArthroCare integration progress and our investment in Bioventus LLP. In October, we visited our Biotherapeutics facility in Fort Worth, Texas, where we met with management and toured the R&D facility.

In September, we held our annual Strategy Review in Singapore and met with members of our ASEAN management team and discussed their opportunities and challenges.

The Board is committed to the highest standards of corporate governance and we comply with all of the provisions of the UK Corporate Governance Code 2012 (‘the Code’). The Company’s American Depositary Shares are listed on the New York Stock Exchange (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 Securities Exchange Commission (SEC) applicable to foreign private issuers. We comply with the requirements of the NYSE and SEC 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 in the reports on the Audit Committee, the Nomination & Governance Committee, the Ethics & Compliance Committee and the Remuneration Committee, how we have applied the provisions and principles of the Financial Conduct Authority’s (FCA) Listing Rules, Disclosure & Transparency Rules (DTRs) and the Code throughout the year.

The Directors report comprises pages 54 to 80, 103, 111, 113, 115 and pages 170 to 193 of the Annual Report.

60 Smith & Nephew Annual report 2014

Working together as a Board

Given the number of changes at Board level in 2014, we decided that our review into the Board’s effectiveness would focus on how we worked together as a Board and how we worked with the Executive Team. This review was led by Brian Larcombe, our Senior Independent Director. He asked the Directors and key members of the Executive team a series of open-ended questions about their views on the role of the Board and its Committees and how we worked together. The results of his review have proved to be very interesting and we are now working on ways to work together even more effectively. This is explained in greater detail on page 68.

Yours sincerely,

Roberto Quarta

Chairman

Overview

The Board is committed to the highest standards of corporate governance. We maintain these standards through a clear definition of our roles, continuing development and evaluation and accountability through the work of the Board Committees.

Smith & Nephew Annual report 201461

CORPORATE GOVERNANCE

Corporate Governance Statement

Leadership 

Diversity and experience

Role 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 of the Chairman and the Chief Executive Officer are clearly defined.
Chairman	Building a well-balanced Board
	Chairing Board meetings and setting Board agendas
	Ensuring effectiveness of Board and enabling the annual review of effectiveness
	Encouraging constructive challenge and facilitating effective communication between Board members
	Promoting effective Board relationships
	Ensuring appropriate induction and development programmes
	Ensuring effective two-way communication and debate with shareholders
	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
	Day-to-day running of the business.

62 Smith & Nephew Annual report 2014

Role of Directors continued

The roles of the Non-executive Directors, Senior Independent Director and the Company Secretary are defined as follows:
Non-executive Directors	Providing effective challenge to management
	Assisting in development and approval of strategy
	Serving on the Board Committees
	Providing advice to management.
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 the annual evaluation into the Board’s effectiveness
	Leading the search for a new Chairman, if necessary.
Company Secretary	Advising the Board on matters of corporate governance
	Supporting the Chairman and Non-executive Directors
	Point of contact for investors on matters of corporate governance
	Ensuring good governance practices at Board level and throughout the Group.

Changes to the Board

Chairman

Roberto Quarta replaced Sir John Buchanan on 10 April 2014

Independent Non-executive Directors

Left the Board during 2014

Ajay Piramal (resigned 24 March 2014)

Richard De Shutter (retired 10 April 2014)

Pamela Kirby (retired 31 July 2014)

Joined the Board during 2014

Vinita Bali (appointed 1 December 2014)

Erik Engstrom (appointed 1 January 2015, since year-end)

Role changed during 2014

Brian Larcombe replaced Richard De Schutter as Senior Independent Director on 10 April 2014

Michael Friedman replaced Pamela Kirby as Chairman of the Ethics & Compliance Committee on 31 July 2014

Smith & Nephew Annual report 201463

CORPORATE GOVERNANCE

Corporate Governance Statement continued

Leadership

Corporate Governance Framework

The Board is responsible to shareholders for approving the strategy of the Group, for overseeing the performance of the Group and evaluating and monitoring the management of risk.

Each member of the Board has access collectively and individually to the Company Secretary and is also entitled to obtain independent professional advice at the Company’s expense, should they decide it is necessary in order to fulfil their responsibilities as Directors.

The day-to-day running of the business is delegated to Olivier Bohuon, the Chief Executive Officer, and his executive team comprising the Executive Officers who are shown on pages 58 to 59.

The Executive Officers form the Commercial and Operations Committee which advises the Chief Executive Officer in decisions relating to the commercial and operational aspects of the business.

The Chief Executive Officer in turn delegates the day-to-day management of the Group functions and regional commercial operations divisions to the Executive Officers, who are assisted in their decision making by their own leadership teams and other committees and councils.

64 Smith & Nephew Annual report 2014

Independence of 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.   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 Boardroom and sometimes, between 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.   We acknowledge that Brian Larcombe has served as an independent Non-executive Director for a period of 13 years, which is a period of time that some might regard as likely to impact his independence. We do not believe this to be the case as Brian Larcombe continues to maintain an independent view within Board discussions. Furthermore, his experience on the Board, wise counsel and corporate memory has been most useful to Roberto Quarta in his first year as Chairman of the Company, particularly in a year when a number of other long-serving directors have left the Board and new Non-executive Directors have been appointed.   Management of Conflicts of Interest   None of our Directors or their 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 23 February 2015.   Each of us as a Director 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 owed to the Company to disclose to the Board any interest in a transaction or arrangement under consideration by the Company.   If any Director becomes aware of any situation which might give rise to a conflict of interest, they inform the rest of the Board immediately and the Board is then permitted under the Company’s Articles of Association to authorise such conflict. This information is then recorded in the Company’s Register of Conflicts, together with the date on which authorisation was given. In addition, each Director certifies 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 permitted to participate in the discussion and a conflict is only authorised if the Board believes that it would not have an impact on the Board’s ability to promote the success of the Company in the long term. Additionally, the Board may determine that certain limits or conditions must be imposed when giving authorisation. No actual conflicts have been identified, which have required approval by the Board. However, six situations have been identified which could potentially give rise to a conflict of interest and these have been duly authorised by the Board and are reviewed on an annual basis.   Outside Directorships   We encourage our Executive Directors to serve as a Non-executive Director of a maximum of one external company. Olivier Bohuon is a Non-executive Director of Virbac group and Julie Brown does not hold such a position. Re-appointment of Directors   In accordance with the Code, all Directors offer themselves to shareholders for re-election annually, except those who are retiring immediately after the Annual General Meeting. Vinita Bali and Erik Engstrom, who were appointed to the Board on 1 December 2014 and 1 January 2015 respectively, will offer themselves for election at the Annual General Meeting. Each Director may be removed at any time by the Board or the shareholders.   Director 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 judgment 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 Board meets with retail investors at the Annual General Meeting and responds to many letters and emails from shareholders throughout the year.   The Executive Directors also meet regularly with institutional 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 2014, the Executive Directors held meetings with institutional investors, including investors representing approximately 46% of the share capital as at December 2014.   Since joining the Company, Roberto Quarta, the new Chairman has taken the opportunity to meet with investors to hear from them their views of the Company and also to talk about his first impressions of the Company and management. He held 12 meetings with investors holding approximately 22% of the share capital. These meetings have been a useful part of his induction process in understanding the Company from the investor perspective.   Joseph Papa, the Chairman of the Remuneration Committee also offered to meet with key institutional investors towards the end of 2014. Most investors were overwhelmingly supportive of our remuneration arrangements and we have made no changes to these arrangements over the year. He therefore met with four investors holding around 2% of the share capital. These were useful discussions giving insight into current investor thinking.   Ian Barlow, the Chairman of the Audit Committee also offered to meet with institutional investors to discuss audit related matters and in particular, the tender process we had followed to select new auditors. The meetings held with five investors holding around 5.45% of the issued share capital were interesting and useful and we welcomed some insightful comments on possible improvements to the Audit Committee Report.   Members of the Board are always happy to engage with investors, if they have matters they wish to raise with the Non-executive team.   A short report on our major shareholders and any significant changes in their holdings since the previous meeting is reviewed at each Board meeting. The Chairman and Non-executive Directors report back to the Board following their meetings with investors. Olivier Bohuon and Julie Brown routinely report on any concerns or issues that shareholders have raised with them in their meetings. Copies of analyst reports on the Company and its peers are also circulated to Directors.

Smith & Nephew Annual report 201465

CORPORATE GOVERNANCE

Corporate Governance Statement continued

Effectiveness

Board timetable

Responsibility of the Board

The work of the Board falls into the following key areas:

Strategy –   Approving the Group strategy including major changes to corporate and management structure –   Approving acquisitions, mergers, disposals, capital transactions in excess of $50 million –   Setting priorities for capital investment across the Group	Risk –   Overseeing the Group’s risk management programme –   Regularly reviewing the risk register –   Overseeing risk management processes (see pages 36 to 39 for further details).
–   Approving annual budget, financial plan, five-year business plan –   Approving major borrowings and finance and banking arrangements –   Approving changes to the size and structure of the Board 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 –   Approving the appointment and removal of key professional advisers.	Shareholder Communications –   Approving preliminary announcement of annual results, the publication of the Annual Report, the half-yearly report, the quarterly financial announcements, the release of price sensitive announcements and any listing particulars, circulars or prospectuses –   Approving the Sustainability Report prior to publication –   Maintaining relationships and continued engagement with shareholders.
Performance –   Reviewing performance against strategy, budgets and financial and business plans –   Overseeing Group operations and maintaining a sound system of internal control –   Determining the dividend policy and dividend recommendations –   Approving the appointment and removal of the external Auditor on the recommendation of the Audit Committee	Providing Advice –   Using experience gained within other companies and organisations to advise management both within and between Board meetings. The Schedule of Matters Reserved to the Board describes the role and responsibilities of the Board more fully and can be found on our website at www.smith-nephew.com
–   Approving significant changes to accounting policies or practices –   Overseeing succession planning at Board and Executive Officer level. –   Approving the use of the Company’s shares in relation to employee and executive share incentive plans on the recommendation of the Remuneration Committee.

66 Smith & Nephew Annual report 2014

What we did

Month
January	–	Considered and approved acquisition of ArthroCare Corporation
(acquisition of ArthroCare)
Early February (Approval of Preliminary Announcement)	–	Reviewed the results for the full year 2013 and the preliminary announcement and approved the final dividend to be recommended to shareholders for approval
	–	Reviewed and approved the annual risk management report
	–	Approved the Budget for 2014 and the five-year Plan for 2014 to 2018
	–	Approved the continuation of the share buy-back programme to repurchase shares issued in connection with share plans on a quarterly basis
	–	Reviewed the results of the review into the effectiveness of the Board in 2013 and agreed action points for 2014
Late February (by telephone) (Approval of Financial Statements)	–	Reviewed and approved the Annual Report and Accounts for 2013, having determined that they were fair, balanced and understandable
	–	Reviewed and approved the Notice of Annual General Meeting and related documentation
Early April	–	Noted, considered and approved the new Commercial organisation structure
	–	Received a presentation on SYNCERA, the new ‘value’ range for our ASD division
	–	Approved the Sustainability Report
	–	Prepared for the Annual General Meeting to be held later that day
Late April (by telephone) (Approval of Q1 results)	–	Reviewed the results for the first quarter 2014 and approved the Q1 announcement
July (Approval of H1 results)	–	Reviewed the results for the first half 2014 and approved the H1 announcement, having considered management’s judgement in a number of areas and approved payment of interim dividend
	–	Received and considered a report analysing the progress of recent acquisitions against expectations at the time of acquisition
	–	Received and discussed annual review of defence planning
	–	Received update reports from Group Taxation and Group Treasury
	–	Approved the appointment of Deutsche Bank as ADR Depositary Bank and the change of the ratio of ADR to ordinary shares
	–	Updated and approved the Schedule of Matters Reserved to the Board
Early October (Strategy Review) Singapore	–	Approved the Strategic Plan for 2015 to 2019 over a two-day Strategy Review with the executive team
	–	Approved the renewal of the Directors’ and Officers’ Liability insurance
	–	Authorised the executive team to arrange the private placement of debt
Late October (Approval of Q3 Results) Fort Worth, Texas	–	Reviewed the results for the third quarter 2014 and approved the Q3 announcement
	–	Received and considered the annual report from the executive team on executive Succession Planning
	–	Received an update on the progress of the integration of ArthroCare
	–	Approved the appointment of Vinita Bali as a Non-executive Director
December (Approval of Budget)	–	Approved the Budget for 2015
	–	Authorised the executive team to conduct a selection process for new corporate brokers
	–	Received a report on the progress of our investment in Bioventus LLP
	–	Received an update on the HR transformation project
	–	Received an update on the Commercial structure within Europe

We also agreed to appoint Erik Engstrom as Non-executive Director by written resolution.

Since the year end, we have also approved the Annual Report and Accounts for 2014 and have concluded that, taken as a whole, they are fair, balanced and understandable. We have approved the Notice of Annual General Meeting, recommended the final dividend to shareholders and have received and discussed the report on the effectiveness of the Board in 2014.

Each meeting was preceded by a meeting between the Chairman and the Non-executive Directors without Executive Directors and management in attendance. Unless otherwise stated, meetings are held in London.

At each meeting, we approved the minutes of the previous meetings, reviewed matters arising and received reports and updates from the Chief Executive Officer, the Chief Financial Officer, the Chief Business Development Officer, the Chief Legal Officer and the Company Secretary. We also received reports from the chairmen of the Board Committees on the activities of these Committees since the previous meeting.

Smith & Nephew Annual report 201467

CORPORATE GOVERNANCE

Corporate Governance Statement continued

Effectiveness

Board and Committee Attendance

	Board Meetings	Audit Committee Meetings	Remuneration Committee Meetings	Nomination & Governance Committee Meetings	Ethics & Compliance Committee Meetings
Director	(9 meetings)	(8 meetings)	(4 meetings)	(3 meetings)	(4 meetings)
Roberto Quarta	9 / 9	–	2 / 27	3 / 3	–
Olivier Bohuon	9 / 9	–	–	3 / 3	–
Julie Brown	9 / 9	–	–	–	–
Vinita Bali1	1 / 1	–	–	–	–
Ian Barlow	9 / 9	8 / 8	–	–	1 / 19
Virginia Bottomley	9 / 9	–	4 / 4	2 / 28	–
Sir John Buchanan2	3 / 4	–	–	1 / 1	–
Michael Friedman3	8 / 9	–	–	–	4 / 4
Pamela Kirby4	6 / 6	–	3 / 3	–	3 / 3
Brian Larcombe	9 / 9	8 / 8	4 / 4	3 / 3	–
Joseph Papa	9 / 9	8 / 8	4 / 4	–	4 / 4
Ajay Piramal5	1 / 3	–	–	–	–
Richard De Schutter6	4 / 4	3 / 3	2 / 2	1 / 1	2 / 2
1  Vinita Bali was appointed to the Board on 1 December 2014 2  Sir John Buchanan retired from the Board on 10 April 2014 3  Michael Friedman was unable to attend one Board telephone update due to a flight delay 4  Pamela Kirby retired from the Board on 31 July 2014			5  Ajay Piramal retired from the Board on 24 March 2014 6  Richard De Schutter retired from the Board on 10 April 2014 7  Roberto Quarta joined the Remuneration Committee on 10 April 2014 8  Virginia Bottomley joined the Nomination & Governance Committee on 10 April 2014 9  Ian Barlow joined the Ethics & Compliance Committee on 2 October 2014

In the event that a Director is unable to attend a Board or Board Committee meeting, they ensure that they are familiar with the matters to be discussed and make their views known to the Chairman of the Board or Board Committee prior to the meeting.

Dear Shareholder, The Chairman asked me as Senior Independent Director to conduct the review into the effectiveness of the Board in 2014. I interviewed all the members of the Board, the Company Secretary and the Head of Human Resources towards the end of 2014, basing our discussions around a short questionnaire prepared by the Company Secretary. The Board scores highly on all the key assessments of our responsibilities for approving strategy, monitoring performance, determining risk, diligence of members’ attendance and quality of discussion. Roberto Quarta, Chairman of the Board is universally respected for his professionalism, chairmanship skills and for	developing an excellent working relationship with Olivier. He has invested the time to understand the business, getting to know the senior executives and the major shareholders and has made excellent progress in strengthening the Board with appointment of new Non-executive Directors. The Committees of the Board were also found to be operating effectively. There has been some healthy discussion around the role played by the Board, with the Non-executives eager to play a more active role in agenda planning, setting the strategy, organisational change and management succession and the appointment of advisers. The Board discussed the results of my findings at our Board meeting in February 2015 and agreed the following actions for 2015:
Action identified
Make more effective use of the annual Board Planner to ensure that all key strategic issues were timetabled appropriately throughout the year
Encourage the executive team to access the diverse competencies of the Non-executive Directors more between Board meetings
Continue the practice of inviting members of the executive team to present regularly to the Board
The review into the Board’s effectiveness in 2015 will be facilitated externally as although we undertake an annual review, the last externally facilitated review was in 2012. The areas for attention identified in the 2013 review have been addressed as follows:
Progress made in 2014 against the Areas for Attention identified in the 2013 review

Succession Planning at Non-executive Director level would be a key priority following the retirement of a number of long serving Non-executive Directors during the year.	Nomination & Governance Committee undertook a comprehensive search for new Non-executive Directors leading to the appointment of Vinita Bali on 1 December 2014 and of Erik Engstrom on 1 January 2015. This process is ongoing. Details of the full search process are given in the Nomination & Governance Committee Report on page 70.
Timing and length of the Board and Committee meetings could be reviewed to consider whether the current pattern of meetings was most effective.	The timing and frequency of Board meetings has been reviewed by the Chairman and the Chief Executive Officer, who have concluded that the current pattern of meetings is appropriate for the Company and fits in well with the programme of executive activities throughout the year. The reporting schedule inhibits changing the Board timetable.

Yours sincerely,

Brian Larcombe

Senior Independent Director

68 Smith & Nephew Annual report 2014

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 these opportunities 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 in which we operate around the world helps us to make investment and strategic decisions. Meeting our local managers also 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 2014, we particularly focused on the changes to Narrative Reporting and reporting on Remuneration as well as the changes incorporated in the UK Corporate Governance Code 2014 and the Financial Reporting Council’s Audit Quality Thematic Review into fraud risks and laws and regulations. New Directors receive tailored induction programmes when they join the Board. In 2014, Vinita Bali commenced her induction programme with a series of meetings with key senior executives and a briefing on UK Company Law and Corporate Governance delivered jointly by our corporate lawyers, Freshfields and our Company Secretary, Susan Swabey. Since the year end, Vinita Bali and Erik Engstrom have continued meeting with key senior executives and a series of visits to our major facilities is planned for them both over the next few months. All Non-executive Directors are encouraged to visit our overseas businesses, if they happen to be travelling for other purposes. 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 Chairman regularly reviews the development needs of individual Directors and the Board as a whole.

Development activities

The following development sessions covering both the Smith & Nephew business and wider market issues were held during the year:

Month	Activity
February	–	Individual cyber profiling sessions with each Director
	–	Presentation from external consultants on the current state of the Medical Devices industry across Europe
April	–	Presentation on new SYNCERA range
July	–	Joint presentation from our corporate brokers on equity markets and investor perceptions of Smith & Nephew
September	–	Meetings with our ASEAN management team in Singapore with presentations from the local Managing Directors in Singapore, Malaysia and Thailand
	–	Presentation from a leading Indian hip surgeon on the challenges in the Indian market
	–	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 the Biotherapeutics facility in Fort Worth, Texas and meetings with the Biotherapeutics research and development teams
	–	Series of presentations from our Advanced Wound Management US Commercial team 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

Succession Planning   The Board is responsible for ensuring that there are effective succession plans in place to ensure the orderly appointment of directors to the Board, as and when vacancies arise. The report from the Nomination & Governance Committee on pages 70 to 71 explains the process the Board and the Nomination & Governance Committee followed in 2014 to build a balanced board for the future in undertaking the search for new Non-executive Directors.   Building a successful executive team is the responsibility of the Chief Executive Officer, although this process is also overseen by the Board. The Chief Executive Officer and Chief Human Resources Officer present a report to the Board on Succession Planning on an annual basis, at which the performance and potential of members of the executive team are discussed and considered. The Board is also given a number of opportunities during the course of the year to meet key members of the executive team at the Strategy Review held annually in September and at the site visits held in October each year. Executive Officers and their direct reports also make regular presentations on different aspects of the business. The Board recognises the importance of getting to know the executive team below Board level both for the purpose of understanding the business better but also in order to plan for executive succession.   By order of the Board, on 25 February 2015     Roberto Quarta Chairman

Smith & Nephew Annual report 201469

CORPORATE GOVERNANCE

Accountability

Accountability

Nomination & Governance Committee Report Dear Shareholder I am pleased to present our Report on the role and activities of the Nomination & Governance Committee in 2014. Current Members in 2014
Roberto Quarta	Committee Chairman
Brian Larcombe	Senior Independent Non-executive Director
Virginia Bottomley (from 10 April 2014)	Independent Non-executive Director
Olivier Bohuon	Chief Executive Officer
1  Sir John Buchanan and Richard De Schutter left the Committee on 10 April 2014 on their retirement from the Board.
Key activities
–  Review the composition of the Board and make recommendations to the Board regarding the appointment of Directors.
–  Oversee governance aspects of the Board and its Committees.
2015 focus
–  Continue to search for one more Non-executive Director with financial expertise.

Role of the Nomination & Governance Committee

Our work falls into the following two areas:

Board Composition

– Reviewing the size and composition of the Board

– Overseeing Board succession plans

– Recommending the appointment of Directors

– Monitoring Board diversity.

Corporate Governance

– Overseeing governance aspects of the Board and its Committees

– Overseeing the review into the effectiveness of the Board

– Considering and updating the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Committees

– Monitoring external corporate governance activities and keeping the Board updated

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

The terms of reference of the Nomination & Governance Committee describe our role and responsibilities more fully and can be found on our website at www.smith-nephew.com

Activities of the Nomination & Governance Committee in 2014 and since the year end

In 2014, we held four physical meetings. Each meeting was attended by all members of the Committee. The Company Secretary, the Head of Human Resources and external search agents also attended by invitation. In between each meeting, various discussions were held between members of the Nominations & Governance Committee and the external search agent. Our programme of work in 2014 was as follows:

Early February (Activities related to the year end)

– Considered and approved the re-appointment of directors who had completed three or six years’ service and the annual appointment of directors serving in excess of nine years

– Reviewed and updated the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Committees

– Considered and discussed the results of the annual review into the effectiveness of the Board

– Noted an update on corporate governance matters relating to reporting and disclosure requirements.

Early September (Appointment of Vinita Bali)

– Reviewed the long list of candidates for the position of Non-executive Director and discussed the outcome of meetings already held with candidates who had been shortlisted

– Agreed to recommend to the Board that Vinita Bali be appointed Non-executive Director.

70 Smith & Nephew Annual report 2014

End October (Appointment of Erik Engstrom)     –  Further reviewed the longlist and shortlist of Non-executive Director candidates and discussed the outcome of meetings held with candidates   –  Agreed to recommend to the Board that Erik Engstrom be appointed Non-executive Director       –  Agreed to hold further meetings with other candidates.   Early December (Appointment of Non-executive Directors)     –  Further reviewed the longlist and shortlist of Non-executive Director candidates and discussed the outcome of meetings held with candidates.   Since the year end, we have also considered the outcomes of the Board Effectiveness review and discussed the future structure of the Board.   Non-executive Directors   During 2014, there were a number of changes to the composition of the Board. Sir John Buchanan retired as Chairman of the Board at the Annual General Meeting after nine years’ service to the Company. Richard De Schutter also retired at the Annual General Meeting following 13 years’ service and Pamela Kirby retired after 12 years’ service in July. Earlier in the year, Ajay Piramal also retired from the Board in March due to the pressure of other commitments. These departures left a number of positions on the Board to be filled. We therefore undertook a search programme to identify suitable new Board members, which resulted in the appointment of Vinita Bali as Non-executive Director with effect from 1 December 2014 and of Erik Engstrom with effect from 1 January 2015. The process we followed was as follows:   –  I worked with Olivier Bohuon, Chief Executive Officer, the Company Secretary and the Head of Human Resources to analyse the skills and experiences we felt that we needed on the Board to implement our Strategy over the next five years. We also analysed the skills and experiences of those Directors who would be remaining on the Board   –  From this review, we identified that we would wish to search for up to three new Non-executive Directors, each with a combination of one or more of the following skills, experiences or backgrounds:   –  Experience of one or more of the Emerging Markets in which we operate;   –  Digital experience – we later modified this to leading a company through a period of considerable technological change;   –  Experience as a Chief Executive Officer in another listed company;   –  At least one new female Non-executive Director;   –  The Board reviewed this analysis and endorsed the skills and experiences against which we would be searching   –  The Nomination & Governance Committee selected Russell Reynolds to undertake the search for new Non-executive directors, having reviewed three firms suggested by the Head of Human Resources and the Company Secretary   –  Russell Reynolds prepared a long list of candidates satisfying one or more of the above criteria and Brian Larcombe and I met with them to discuss the longlist and select a shortlist of suitable candidates     –  Members of the Nomination & Governance Committee then met individually with a number of candidates. Additional Board members were also asked to meet certain candidates where there were particular interests or experiences –  The Nomination & Governance Committee agreed to recommend that the Board appoint Vinita Bali and Erik Engstrom as Non-executive Directors.   The Nomination & Governance Committee selected Vinita Bali to be a Non-executive Director because of her experience as a very senior commercial executive in a wide range of Emerging Markets across India, Africa and South America.   We selected Erik Engstrom because of his experience in his role as Chief Executive Officer leading his company Reed Elsevier through significant technological change and his ability to add value to our Audit Committee.   Russell Reynolds also undertook succession planning assessments on behalf of management. The Committee is satisfied that their advice is objective and independent.   Diversity   We aim to have a Board which represents a wide range of backgrounds, skills and experiences. We also value a diversity of outlook, approach and style in our Board members. We believe that a balanced Board is better equipped to consider matters from a broader perspective and therefore come to decisions that have considered a wider range of issues and perspectives than would be the case in a more homogenous Board. Diversity is not simply a matter of gender, ethnicity or other easily measurable characteristic. Diversity of outlook and approach is harder to measure than gender or ethnicity but is equally important. A Board needs a range of skills from technical adherence to governance or regulatory matters for an understanding of the business in which we operate. It needs some members with a long corporate memory and others who bring new insights from other fields. There needs to be both support and challenge on the Board as well as a balance of gender, commercial and international experience. When selecting new members for the Board, we take these considerations into account, as well as professional background. A new Board member needs to fit in with their fellow Board members, but also needs to provide a new way of looking at things.   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. 30% of our Board is female. We do not regard this as a fixed percentage as the number of Board members will fluctuate from time to time and we would not necessarily expect to replace any retiring Director with a new Director of the same gender. We will still continue to appoint Directors on merit, valuing the unique contribution that they will bring to the Board, regardless of gender.   Governance   During the year, the Nomination & Governance Committee also addressed a number of governance matters. We also received updates from the Company Secretary on new developments in corporate governance and 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.   Yours sincerely,     Roberto Quarta Chairman of the Nomination & Governance Committee

Smith & Nephew Annual report 201471

CORPORATE GOVERNANCE

Accountability continued

Ethics & Compliance Committee Report Dear Shareholder I am pleased to present our Report on the role and activities of the Ethics & Compliance Committee in 2014. Current Members in 2014
Michael A. Friedman (from 31 July 2014)	Committee Chairman
Ian Barlow (from 2 October 2014)	Independent Non-executive Director
Joseph Papa	Independent Non-executive Director
1  Richard De Schutter left the Committee on 10 April 2014 on their retirement from the Board.
2  Pamela Kirby left the Committee on 31 July 2014 on her retirement from the Board.
3  Vinita Bali will join the Committee on 1 April 2015.
Key activities
–  Reviews ethics and compliance processes and practices across the Group.
–  Oversees quality and regulatory matters.
–  Monitors significant compliance, quality and regulatory issues or failures as they arise.
2015 focus
–  Develop a deeper oversight of quality and regulatory matters.
–  Continue to focus on compliance issues within the context of our acquisition programme.
–  Continue to enhance the compliance processes and practices of our third party distributors.

Role of the Ethics & Compliance Committee

Our work falls into the following two general areas:

Ethics & Compliance

– Overseeing ethics and compliance programmes

– Monitoring ethics and compliance policies and training programmes

– Reviewing compliance performance based on monitoring, auditing and investigations data

– Reviewing allegations of significant compliance issues

– Overseeing the Group’s internal and external communications relating to ethics and compliance matters

– Reviewing external developments and compliance activities

– Receiving reports from the Group’s Ethics & Compliance Committee meetings and from the Chief Compliance Officer and the Chief Legal Officer.

Quality Assurance and Regulatory Assurance

– Overseeing the processes by which regulatory and quality risks relating to the Company and its operations are managed

– Receiving and considering regular functional reports and presentations from the SVP Quality Assurance and Regulatory Assurance (QARA).

The terms of reference of the Ethics & Compliance Committee describe our role and responsibilities more fully and can be found on our website at www.smith-nephew.com

72 Smith & Nephew Annual report 2014

Activities of the Ethics & Compliance Committee in 2014 and since the year end

In 2014, we held four physical meetings. Each meeting was attended by all members of the Committee. The Company Secretary, the Chief Legal Officer, the Chief Compliance Officer and the SVP Quality Assurance and Regulatory Assurance also attended by invitation. Our programme of work in 2014 included the following:

February

– Noted that the SEC and DOJ had confirmed the termination of the independent monitorship in January 2014 and that the Company was now subject to self-reporting. Discussed and noted the requirements of self-reporting

– Noted the ethics and compliance due diligence and integration work being undertaken in respect of recent transactions in India, Turkey and Brazil and the Biotherapeutics business

– Noted the preparations being made in capturing data to be filed under the US Sunshine Act and considered the Sunshine legislation in other territories.

April

– Reviewed the processes in place to ensure oversight over third party sellers

– Noted the ethics and compliance due diligence and integration work being undertaken in respect of recent transactions in India, Turkey and Brazil and ArthroCare

– Noted that the first aggregate payment report under the US Sunshine Act had been filed in March 2014 and considered the Sunshine legislation in other territories.

July

– Noted that the Company’s first self-reporting report would be filed with the SEC and DOJ in July 2014.

October

– Reviewed the results of 2014 ethics survey

– Noted the data recently published under the US Sunshine Act in respect of both the Company and its competitors

– Received a report from the SVP Quality Assurance and Regulatory Assurance on the activities of the QARA function, reviewing the quality and regulatory challenges faced across the Company and initiatives to address them.

At each meeting we noted and considered the activities of enforcement agencies and investigation of possible improprieties. We also reviewed a report on the activities of the Group Ethics & Compliance Committee and reviewed the progress of the Global Compliance Programme.

Since the year end, we have also reviewed the work of the Group Ethics & Compliance Committee meeting held in November 2014, considered the compliance implications of recent acquisitions and continued our oversight of the Quality Assurance and Regulatory Assurance function.

Employee Compliance Programme

New employees are trained on our Code of Conduct, which sets out the basic legal and ethical principles for conducting business. A copy of the Code of Conduct can be found on our website at www.smith-nephew.com

Further support is provided through a comprehensive set of tools and resources located on our global intranet platform. These tools and resources are regularly updated.

The Code of Conduct includes our whistle-blower 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 any 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 with respect to anyone who makes a report in good faith. The Ethics & Compliance Committee is advised of any potentially significant improprieties from time to time, and the Company’s response.

In 2014, we continued to work to enhance the employee compliance training programme. New employees receive training on our Code of Conduct (‘Code’), and we assign annual compliance training to employees. In 2014, we updated our Code training. The new module is more interactive, role-based and allows individuals to apply the Code in different scenarios.

We also developed and piloted a face-to-face course for new managers, supplementing the on-line manager certification training. In 2015, all new managers will be required to complete both the on-line and the face-to-face course.

Smith & Nephew Annual report 201473

CORPORATE GOVERNANCE

Accountability continued

Compliance Programme for Third Parties   We continually 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 have augmented monitoring and auditing programmes in 2014.   We expanded our oversight of third party sellers with site assessments to check compliance controls and monitoring visits to review books and records.   We have continued to strengthen 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 focused on potentially higher risk third parties. We have established a policy and process requiring that managers prioritise our oversight of 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.   Compliance implications around acquisitions   In both 2013 and 2014, there has been increased strategic acquisition activity across the Group. In all cases, we undertake comprehensive due diligence evaluation prior to acquisition and implement compliance integration plans from the point of executing the acquisition. This is to ensure that new businesses are integrated into the Smith & Nephew compliance culture as soon and consistently as possible and that all new employees are immediately made aware of how we do things at Smith & Nephew. Oversight of Quality Assurance and Regulatory Assurance Function   During the course of 2014, it was agreed that primary oversight of the Quality Assurance and Regulatory Assurance Function (QARA) would move from the Audit Committee to the Ethics & Compliance Committee. Product safety is at the heart of our business and regulatory authorities enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products, including review of the safety and efficacy of such products. Jerry Porreca, SVP Quality Assurance and Regulatory Assurance presented to the Ethics & Compliance Committee in October 2014, explaining the new structure of the QARA function and the current focuses and initiatives being addressed by the function. The QARA function is built on four pillars – quality assurance, regulatory affairs, customer complaints and quality systems and regulatory compliance.   Going forward, the Ethics & Compliance Committee will monitor the work of the QARA function on a quarterly basis, approve the QARA annual programme of work, as outlined in their 3-Year QARA Plan, consider any quality or regulatory issues that arise during the year, and approve any appropriate remedial action.   Yours sincerely,     Michael A. Friedman Chairman of the Ethics & Compliance Committee

74 Smith & Nephew Annual report 2014

Audit Committee Report   Dear Shareholder I am pleased to present our Report on the role and activities of the Audit Committee in 2014. Current Members in 2014		Role of the Audit Committee Our work falls into the following five areas: Financial Reporting –  Reviewing significant financial reporting judgments 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 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
Ian Barlow	Committee Chairman and designated financial expert
Erik Engstrom (from 1 January 2015)	Independent Non-executive Director
Brian Larcombe	Senior Independent Non-executive Director
Joseph Papa	Independent Non-executive Director
1  Richard De Schutter left the Committee on 10 April 2014 on his retirement from the Board.
Key activities
–  Undertake independent assessment of the financial affairs of the Company.
–  Oversee system of control and risk management throughout the Group.
–  Undertake detailed work to support the Board’s approval of the financial results.
2015 focus
–  Consideration of how to address the requirement to publish a Viability Statement in the 2015 Annual Report and more detailed risk management reporting.
–  Monitor the roll-out of enhanced consistently applied financial controls across the Group.

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Accountability continued

Activities of the Audit Committee in 2014 and since the year end

In 2014, we held five physical meetings and three meetings by telephone. Each meeting was attended by all members of the Committee. The Chief Executive Officer, the Chief Financial Officer, the Head of Internal Audit (following her appointment in May 2014), the external auditor and key members of the finance function, the Company Secretary and Deputy Company Secretary also attended by invitation. We also met regularly with the external auditor without management present. Our programme of work in 2014 was as follows:

Month	Activity
Early February (Approval of Preliminary Announcement)	–	Reviewed the results for the full year 2013 and the preliminary announcement and recommend them for adoption by the Board
	–	Reviewed the effectiveness of financial controls and of the risk management process and concluded they were operating effectively
	–	Received the Internal Audit Report and approved the Internal Audit work programme for 2014
	–	Received the Quality Assurance Report and approved the Quality Assurance work programme for 2014
	–	Received the fraud report and reviewed whistle-blowing procedures
	–	Approved external audit fees and the policy for pre-approval of EY non-audit tax fees and noted consulting fees paid to other major audit firms
Late February (by telephone) (Approval of Financial Statements)	–	Reviewed and approved the Annual Report and Accounts for 2013, having considered whether they were fair balanced and understandable, and recommended them for adoption by the Board
	–	Considered the effectiveness of the external auditor and concluded that their work had been effective
	–	Agreed to put the audit out to tender for the financial year 2015
Early April (Presentations from prospective audit firms)	–	Confirmed the detailed plan for the audit tender and appointed the Audit Tender Steering Committee
	–	Received a presentation from the three audit firms planning to participate in our audit tender process
Late April (by telephone) (Approval of Q1 results)	–	Reviewed the results for the first quarter 2014 and approved the Q1 announcement
Early July (by telephone) (Appointment of new Auditors)	–	Considered and approved the recommendation of the Audit Tender Steering Committee to appoint KPMG LLP as the Company auditors for the year ending 31 December 2015
Late July	–	Reviewed the results for the first half 2014 and approved the H1 announcement
(Approval of H1 results)	–	Reviewed the Progress Report from Internal Audit which included an update on the status of the 2014 Internal Audit plan
	–	Received the fraud report and reviewed whistle-blowing procedures
	–	Reviewed and discussed the due diligence process for acquisitions, noting improvements made to this process in the past year
	–	Reviewed and approved the external Auditor’s Audit Plan for 2014
October	–	Reviewed the results for the third quarter 2014 and approved the Q3 announcement
(Approval of Q3 Results)	–	Approved the terms of the engagement letter of EY as Auditors for the financial year 2014
	–	Reviewed the Progress Report from Internal Audit, the status of the 2014 Internal Audit plan and two internal audit reports.
	–	Approved the Group Risk management programme conducted in 2014
	–	Considered and discussed the updated UK Corporate Governance Code issued by the Financial Reporting Council
	–	Considered and discussed the Financial Reporting Council’s Audit Quality Thematic Review - Fraud risks and laws and regulations.
	–	Received the fraud report and reviewed whistle-blowing processes
	–	Noted the progress of the European IT SAP implementation project
	–	Reviewed the inspection reports on EY from the Financial Reporting Council (UK) and the Public Company Accounting Oversight Board (US)
	–	Reviewed and discussed the roll-out of the Minimum Acceptable Practices for Finance and other control focussed initiatives
December	–	Reviewed and updated the terms of reference of the Audit Committee
(Review of Functional	–	Considered and approved critical accounting policies and judgments in advance of the 2014 year end
Reports)	–	Considered and approved the external audit plan for 2015
	–	Reviewed and approved the layout and design of the Annual Report 2014
	–	Received and discussed a report on the Finance transformation project and reports from the Head of Taxation, the Group Treasurer and the Chief Information Officer on Disaster Recovery and IT risk. These reports focused on the respective controls and risks within each function

During the year, we also approved our Policy on the use of Conflict Minerals by written resolution.

Since the year end, we have also reviewed the Annual Report and Accounts for 2014 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 12, and the key performance indicators and their link to the strategy.

76 Smith & Nephew Annual report 2014

Significant matters related to the financial statements

We considered the following key areas of judgement in relation to the 2014 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 orthopaedic business model (whose finished goods inventory makes up 81% 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 the level of provisioning and material areas at risk. The provisioning level was 21.5% at 31 December 2014 (26.0% as at 31 December 2013). 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 judgements have not moved materially during the year, with some cases having been resolved, and we have determined that the proposed levels at year end of $74 million in 2014 ($86 million in 2013) 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, acquisition intangible assets and investments 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 that the review and disclosure 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 judgments about the future statutory profitability of constituent entities of the Group.	We annually review our processes and approve the principles for management of tax risks. We review quarterly reports from management evaluating existing risks and tax provisions, concluding that the levels of provisions was appropriate.
Business combinations
The Group has identified ‘growth through acquisitions’ as one of its Strategic Priorities. During 2014, we acquired ArthroCare Corporation; the determination of the balance sheet fair value acquired is dependent upon understanding the circumstances at acquisition and estimates of the future results of the acquired business and management judgement is a factor in making these determinations.	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. For material acquisitions, management engage third party specialists to perform a detailed analysis, summaries of which are included in management reports. We reviewed, discussed and approved these reports.

We note that within the External Audit report there is a principal risk associated with the timing of revenue recognition and measurement of related reserves as required by auditing standards. We have considered this and have concluded that we have appropriate procedures and controls in place not to include this as a significant area of judgement.

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CORPORATE GOVERNANCE

Accountability continued

External Auditor

Independence of External Auditors

The independence of our external auditors is critical for the integrity of the audit. Our Auditor Independence Policy, which ensures that this independence is maintained, is available on the Company’s website. We believe that the implementation of this policy helps ensure that auditor objectivity and independence is safeguarded. The policy governs our approach when we require our external auditor to carry our non-audit services, and all such services are strictly governed by this policy. During 2014, fees paid to Ernst & Young LLP, our external auditor, for non-audit work totalled $1.8 million, representing 35% of total audit fees. Full details are shown in Note 3.2 of the Notes to the Group accounts. During 2014, fees paid to KPMG LLP, who will be appointed as our external auditors at the Annual General Meeting, amounted to $3.9 million. The provision of non-audit services by KPMG will be subject to our Auditor Independence Policy and the level of these services will be monitored closely. It is not expected that the level of non-audit services provided by KPMG will be as high in 2015.

The Auditor Independence Policy also governs the policy regarding audit partner rotation. In 2014, Les Clifford who had been our audit partner for five years was replaced by Michael Rudberg.

Effectiveness of External Auditors

Although EY will cease to be the Company’s external auditors at the Annual General Meeting, we felt that it would still be useful to carry out a review of the effectiveness of the external audit process and the quality of the audit, as the findings could be of use to KPMG, the incoming external auditor. We therefore conducted a review into the effectiveness of the external audit as part of the 2014 year-end process, in line with previous years. We sought the views of key members of the finance management team, considered the feedback from this process and shared it with management, EY and KPMG.

During the year, we also considered the inspection reports from the Audit Oversight Boards in the UK and US and determined that we were satisfied with the audit quality provided by EY.

The Audit Quality Review Team of the Financial Reporting Council in the UK reviewed the 2013 audit EY performed of the Company. We have discussed the results of this inspection with EY and are satisfied that the points raised by the review have been appropriately addressed in the 2014 audit.

Overall therefore, we concluded that EY had carried out their audit for 2014 effectively.

Appointment of External Auditors at Annual General Meeting

Ernst & Young LLP will be retiring as the Company’s external auditor at the Annual General Meeting. The reports of Ernst & Young LLP on the Company’s financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company’s financial statements for each of the two fiscal years ended 2013 and 2014, and in the subsequent interim period to 23 February 2015, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the matter in their report.

Resolutions will be put to the Annual General Meeting to be held on 9 April 2015 proposing the appointment of KPMG LLP as the Company’s Auditors and authorising the Board to determine their remuneration, on the recommendation of the Audit Committee.

Disclosure of Information to the Auditors

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.

Audit and Professional Fees paid to the Auditor

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:

	2014	2013
	$ million	$ million
Audit	3	3
Audit-related fees	–	–
Tax	2	3
Other	–	–
Total	5	6

Internal Audit

Our Internal Audit function reports directly to the Audit Committee and is headed by Jenny Morgan, Senior Vice President Internal Audit, whom we appointed in May 2014. She has subsequently restructured her team to meet the requirements of the evolving nature of our business, particularly in Emerging Markets and new acquisitions.

The internal Audit function carries out work in the following three areas:

– Financial systems and processes;

– Systems that ensure compliance with our Code of Conduct, regulation and laws; and

– Quality management systems in our manufacturing activities.

In all three areas, they act as a third line of defence behind operational management’s front line and the Company’s internal assurance activities within Group Finance Compliance and Quality Assurance. During the year, they completed 26 reviews across the business. The Audit Committee receives a quarterly report of the activities of the Internal Audit function and reviews the results of the Internal Audit reports, looking in detail at any reports with unsatisfactory ratings. We also receive a quarterly report detailing any unremediated and overdue control recommendations and oversee the effective and timely remediation of any recommendations.

Specific activities of the Internal Audit function in 2014 were the review of the design of the post-deal acquisition review process and the calculation of the benefits and costs associated with the Group Optimisation programme. In addition site specific audits were conducted of the China commercial business and the new acquisitions in Turkey and India to ensure that integration efforts were in line with approved plans.

In 2015, we will continue to monitor Internal Audit’s scope of work and operational methods to ensure that it continues to play a full role in providing assurance over the Group’s identification and management of risk and its associated controls.

During 2014, KPMG carried out an external review into the effectiveness of the Internal Audit function. The review made a number of recommendations regarding the role and remit of internal audit, the resourcing of the function and the development of integrated working with other functions to provide a more holisitc approach to risk and assurance across the Group. These recommendations were accepted and are being implemented.

Since this review, the Internal Audit function has been strengthened by the appointment of Jenny Morgan, the new Senior Vice President Internal Audit who has in turn restructured the function as detailed above.

78 Smith & Nephew Annual report 2014

Tender of External Audit Services EY and their predecessor firms have been the Company’s auditors since the Company listed in 1937. We have been very satisfied with the effectiveness of the external audit process and the quality of the audit and have undertaken a number of measures to ensure that the external auditor has continued to maintain its independence. However, in common with a number of other companies, as we explained in our Audit Committee Report last year, we recognised in 2014, that it was the right time to put the external audit out to tender. During the early summer of 2014, I led a process to select a new external auditor for the year ending 31 December 2015. I worked with the Group’s procurement function and established a Steering Committee comprising myself, Brian Larcombe, member of the Audit Committee and Senior Independent Director, Julie Brown, the Chief Financial Officer, Susan Swabey, the Company Secretary and Dan Baker, Senior Vice President Group Finance. Given the size, complexity and geographical scope of the business, we invited Deloitte, KPMG and PwC to take part in the tender for carrying out our external audit. In addition, in light of the emerging rules from Europe, we reached mutual agreement with EY that they would not take part in the tender process.	identification, audit approach to risks audit scope. These written tenders also included the proposed audit fee, as we believed that as well as ensuring the quality of the audit, we also needed to have regard to the sensible containment of costs. 5. Early July – In the week leading up to the presentation, each audit firm was asked to prepare a response to an audit query, the same query for each firm, to simulate real life working and allow the Steering Committee to assess how well they responded to a request at short notice and how they interacted with the Committee on a technical issue. 6. Early July – Each firm was asked to make a presentation to the Steering Committee explaining why we should select them as our external auditors. 7. Early July – Following the presentations and further discussions, the Audit Committee met and considered the recommendation of the Steering Committee and agreed to appoint KPMG LLP as our external auditors for the 2015 financial year. A resolution to this effect will be submitted to shareholders for approval at the Annual General Meeting.
Prior to the commencement of the tender process, each firm was invited to make a presentation to the early April Audit Committee meeting on a project on which they had recently been working with the Company. This was to ensure that each firm had sufficient exposure to the Audit Committee prior to the financial tender. We were conscious that the audit tender process is time and resource consuming, both for the firms involved and for the Company, and were therefore determined to have a concise yet thorough process, ensuring equivalent access to management for each firm. We undertook the following process over just six weeks: 1. Late May – Issued the request for tender.	Throughout the process, we were mindful of the need to preserve the independence of the external audit. As part of the tender, each firm was required to disclose all existing relationships with the Company and explain their proposals for ensuring that these relationships would not cause any conflict of interest after 1 January 2015. Given that up until 2008, I was Senior Partner in London with KPMG, we were aware that there might be some concerns about my independence. In order to address this, our Chairman Roberto Quarta joined the Steering Committee for the final stage of presentations to ensure impartiality was maintained. We also noted that other senior members of the finance team had recently joined the Company from other tendering firms.
2. Late May – Participating firms attended a joint workshop over a period of two days. This included a group meeting with all firms with a series of presentations from key members of management, explaining their key expectations from the external audit process, as well as a series of individual meetings with management. 3. Late May – Each firm was granted access to key senior members of management in a structured programme following the workshop, and then given access to senior managers and finance staff throughout the Group to help them understand the business further. 4. End June – Each firm submitted their written tender document covering predetermined areas of focus, including risk	We chose KPMG to be our external auditors as we felt that they had demonstrated that they understood our business and risks well and could work both constructively and in a challenging manner with our management and provide the Audit Committee with the assurances we would need to fulfil our role. The audit of the 2014 Annual Report and Accounts will therefore be the last external audit to be conducted by EY. I should therefore like to record my thanks to EY and their partners and staff for their many years of excellent service to the shareholders of Smith & Nephew. As Chairman of the Audit Committee for the past five years, I have enjoyed working with them and have valued the insights and professionalism they have brought to the Audit Committee meetings.

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 2014 and up to the date of approval of this Annual Report. No concerns were raised with us in 2014 about possible improprieties in matters of financial reporting.

In coming to this conclusion:

– We received regular reports from the Internal Audit and Group Finance functions 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. 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 the framework is reviewed annually by Internal Audit and by the Audit Committee. In 2014, the Audit Committee concluded that the framework was effective.

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Accountability continued

Evaluation of Internal Controls

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 US 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:

The management of each Division is responsible for the establishment and review of effective 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 Senior Vice President, Group Finance and the heads of the Financial Controls and Compliance, 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 limitation, 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. The system of internal control is not applied to the entities in which the Group does not hold a controlling interest. 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. Other than the integration of ArthroCare 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.

The Board is 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. The Board has 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 2014 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 2014. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded on 23 February 2015 that the disclosure controls were effective as at 31 December 2014.

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 2014 in accordance with the requirements in the US under s404 of the Sarbanes-Oxley Act. In making that 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 2014, 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 2014. This report appears on page 105.

Code of Ethics for Senior Financial Officers

We have adopted a Code of Ethics for Senior Financial Officers, which applies to the Chief Executive Officer, the Chief Financial Officer, the Senior Vice President Group Finance and the Group’s senior financial officers. There have been no waivers to any of the Code’s provisions nor have there been any amendments to the Code during 2013 or up until 23 February 2015. A copy of the Code of Ethics for Senior Financial Officers can be found on our website at www.smith-nephew.com.

In addition every individual in the finance function certifies to the Chief Financial Officer that they have complied with the Finance Code of Conduct.

Evaluation of Effectiveness of the Audit Committee

The effectiveness of the Audit Committee was evaluated as part of the review into the effectiveness of the Board conducted at the end of 2014. The results of this review are described on pages 66 to 67 of this Annual Report.

Yours sincerely,

Ian Barlow

Chairman of the Audit Committee

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Remuneration report

Remuneration

Dear Shareholder,

The Board focuses on the long-term future of the Company. We are delivering on our strategy to rebalance Smith & Nephew by strengthening our higher growth platforms, which now represent more than half the business, up from just 35% in 2011. In 2014, we undertook a number of important actions to accelerate this transformation:

– We drove a much improved performance in US Hip and Knee Implants, and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities.

– We strengthened our higher growth platforms, acquiring ArthroCare to give us a broader sports medicine portfolio.

– We created new growth platforms, the mid-tier portfolio for Emerging markets, and Syncera, as well as delivering double-digit growth from our recent acquisition Advanced Wound Bioactives.

The role of the Remuneration Committee is to design a remuneration strategy that drives performance aligned to the strategic priorities.

Our performance in 2014 reflected the choices we made to continue investing to transform Smith & Nephew and, as a result, the Group enters 2015 stronger, more efficient, and set for higher growth. However, these choices did impact profit and cash performance in 2014 and consequently performance against the financial measures in the Annual Incentive Plan and the resulting payouts under this plan are accordingly lower than in previous years. The Remuneration Committee recognises that the Executive Directors made the right decisions for the long-term future of the Company and for the benefit of shareholders, and performed well against their business objectives.

In devising our remuneration arrangements, 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 13 of the Annual Report. These performance measures are summarised on the following page.

Our remuneration arrangements have essentially remained unchanged from last year and we will therefore not be asking shareholders to vote on a new remuneration policy. We have however chosen to replicate the policy you approved last year following the annual report on remuneration for ease of reference.

During the year, Richard De Schutter and Pamela Kirby ceased to be members of the Remuneration Committee on their retirement from the Board. We value the contribution they each made to the work of the Committee during the years they served and thank them both for their work.

We welcome the opportunity we have had during the year to meet with our investors to discuss our remuneration arrangements and we thank the shareholders who met with us for their valuable contributions and insights into the way we think about remuneration. We were delighted to have received the ICSA Excellence in Governance Award for “Best Remuneration Report” in FTSE 100 in 2014.

Yours sincerely,

Joseph Papa

Chairman of the Remuneration Committee

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Remuneration report continued

Measure 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
Business process	We need to release resources from the businesses through improved structures, efficiencies and business processes in order to re-invest in our higher growth areas, including Emerging & International Markets, innovation, organic growth and acquisitions.
People	We need to attract and retain the right people to achieve our strategy through improving our operating model.
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
Free Cash flow	Cash flow from our Established Markets is necessary in order to fund growth in Emerging & International 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.
TSR	If we execute our strategy successfully, this will lead to an increased return for our shareholders.

Compliance statement

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.

The first part of the Report (pages 83 to 93) 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 9 April 2015. The Implementation Report explains how the remuneration policy was implemented during 2014 and also how it is currently being implemented in 2015. Pages 85, and 88 to 90 have been audited by Ernst & Young LLP.

The second part of the Report (pages 94 to 102) is the Directors’ Remuneration Policy Report (the ‘Policy Report’) which was approved by shareholders at the Annual General Meeting held in 2014. The Policy Report describes our remuneration policy as it relates to the Directors of the Company. 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 two 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 level of base salary and benefits paid and performance measures shown in the Policy Report are as at 2014, when the Policy Report was approved by shareholders. Full details of any changes to these details since then, in accordance with the Policy Report are given in the Implementation Report.

82 Smith & Nephew Annual report 2014

The Implementation Report

Remuneration Committee		Role of the Remuneration Committee Our work falls into the following three areas: Determination of Remuneration Policy and Packages –  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 –  Consideration of remuneration policies and practices across the Group –  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. Oversight of all Company Share Plans –  Determination of the use of long-term incentive plans and oversees the use of shares in all executive and all-employee plans. Reporting and Engagement with shareholders on Remuneration Matters –  Approval of Directors’ remuneration report ensuring compliance with related governance provisions –  Continuance of constructive engagement on remuneration issues with shareholders. The terms of reference of the Remuneration Committee describe our role and responsibilities more fully and can be found on our website at www.smith-nephew.com
The Remuneration Committee presents the annual report on remuneration, (the ‘Implementation Report’), which together with the annual statement from the Chairman of the Remuneration Committee will be put to shareholders as an advisory vote at the Annual General Meeting to be held on 9 April 2015.
Current Members in 2014
Joseph Papa	Committee Chairman
Virginia Bottomley	Independent Non-executive Director
Brian Larcombe