CORPORATE GOVERNANCE

The Chief Executive Officer takes responsibility for the Company’s Corporate Governance policy.

The Board recognises and fully supports the principles of good governance as set out in the 2006 Financial Reporting Council Code on Corporate Governance (the “Code”). Save as identified and explained below, the Board considers that it has complied with the principles as set out in Section 1 of the Code.

The Board currently comprises two Executive Directors, including the Executive Chairman, and six Non-Executive Directors.

During the year there were the following changes to the Board:

On 2 May 2008 Per Sjöberg and Anders Böös retired as Chief Executive Officer and Non-Executive Director, respectively, and Henry Klotz was appointed Chief Executive Officer.

On 8 May 2008 Steven Board, Chief Operating Officer and Company Secretary, resigned from the Board and Tom Thomson was appointed Company Secretary in addition to his role as Non-Executive Vice Chairman.

On 25 November 2008 Joseph Crawley and Christopher Jarvis were appointed as Non-Executive Directors of the Company.

On 31 December 2008 James Dean retired as a Non-Executive Director.

Their biographies can be found on page 27 of the 2008 Annual Report & Accounts.

The Board notes that the Code guidance recommends that at least half the Board should comprise independent Non-Executive Directors. The Board recognises it is not compliant with this provision of the Code. It has determined that Malcolm Cooper and Christopher Jarvis are independent in character and judgement and that there are no relationships or circumstances which could materially affect or interfere with the exercise of their independent judgement. It has further determined that Bengt Mortstedt, Thomas Thomson, Joseph Crawley and Thomas Lundqvist are not independent as set out in the Code. Bengt Mortstedt and Thomas Lundqvist have both served for more than 9 years as Directors. The Board is satisfied with the experience, expertise and performance that each board member continues to contribute but it will seek to appoint a further independent Non-Executive Director as soon as a suitable candidate has been identified. Thomas Lundqvist will continue to serve on the Board of the Company but will relinquish his chairmanship of the Remuneration Committee and membership of the Audit Committee once the new independent Non-Executive Director has been appointed. The current composition of the Board continues to exercise objectivity in decision-making and proper control of the Company’s business.

During the year the Chairman has conferred with the Non-Executive Directors without the other Executive Director present. Due to the changes to the Board that have taken place during the year, and in particular with regard to the appointment of new Non-Executive Directors, a formal meeting of the Non-Executives without the Executive Director or the Chairman present will be arranged when the new appointees are more familiar with the Group. The Board therefore recognises it has not fully complied with provision A.1.3 of the Code.

In accordance with the Articles of Association, all Directors are subject to election by shareholders at the first Annual General Meeting after their appointment, and are subject to re-election at least every three years. Non-Executive Directors are appointed for a specific term of office which provides for their removal in certain circumstances, including under section 168 of the Companies Act 2006. The terms of appointment of the Non-Executive Directors can be obtained by request to the Company Secretary. Those Directors seeking re-election and re-appointment at the forthcoming Annual General Meeting are detailed in the Directors’ Report on page 28 of the 2008 Annual Report & Accounts.

Following the resignation of James Dean on 31 December 2008, the Board has appointed Malcolm Cooper to be the Senior Independent Director. As recommended by the Code, he is available to shareholders who cannot appropriately approach either the Chairman or the Chief Executive about a Company matter.

The Board’s primary objective is to focus on adding value to the assets of the Group by identifying and assessing business opportunities and ensuring that potential risks are identified, monitored and controlled. Matters reserved for Board decisions include strategic long-term objectives and capital structure of major transactions. The implementation of Board decisions and day to day operations of the Group are delegated to Management.

Board members are given appropriate documentation in advance of each Board and Committee meeting and senior executives below Board level attend Board meetings to present and discuss their areas of speciality. In making commercial assessments the Directors review detailed plans including financial viability reports that, among other things, detail the impact of proposals in respect of return on capital, return on cash and the likely impact on the income statement, cash flows and gearing.

Strategy is determined after having taken due regard of forecast domestic and international developments. The views of shareholders are sought by the Executive Chairman and Chief Executive Officer and are reported back to the Board. The Board is also advised of the views of shareholders as received by the Company’s brokers.

Group and divisional budgets and quarterly financial forecasts including net assets and cashflow projections are formally reviewed by the Board on a quarterly basis. In addition the Executive Directors monitor cashflows on a weekly basis.

The Board met five times during the year and is responsible to the shareholders of the Company for the strategy and future development of the Group and the management of its resources. The Board has a formal schedule of matters specifically reserved to it for decision, which is kept under review; other decisions are dealt with as day-to-day matters by management. Directors are, where necessary, able to obtain independent professional advice at the Company’s expense and have access to the services of the Company Secretary. They are given appropriate training and assistance on appointment to the Board and later, if and when required.

During the year, the Chairman has undertaken a process of review of the Board, its Committees and Directors as recommended by the Code. This process included assessing the contribution to the Group of each individual Board member. The performance of the Chairman was reviewed by the Non-Executive Directors.

On 1 October 2008 the new conflicts of interest regime for Directors contained in the Companies Act 2006 came into force. In compliance with the new conflicts of interest regime, the Company’s articles of association were amended by Special Resolution on 14 November 2008 and contain procedures to deal with Directors’ conflicts of interest which the Board has fully implemented. The Board considers that these have operated effectively following their implementation.

The attendance of Directors at meetings during the year is set out below:

	Board	Audit Committee	Remuneration Committee
Number of meetings held	5	3	1
Sten Mortstedt	5/5	-	-
Henry Klotz (1)	4/4	-	-
Per Sjoberg (2)	1/1	-	-
Anders Boos (2)	1/1	1/1	-
Steven Board (3)	1/1	-	-
Tom Thomson	5/5	-	-
Malcolm Cooper	5/5	3/3	-
Joseph Crawley (4)	1/1	-	-
Christopher Jarvis (4)	1/1	-	-
James Dean (5)	5/5	2/3	1/1
Thomas Lundqvist	5/5	3/3	1/1
Bengt Mortstedt	5/5	-	-

(1) Appointed to the Board 2 May 2008
(2) Resigned from the Board 2 May 2008
(3) Resigned from the Board 8 May 2008
(4) Appointed to the Board 25 November 2008
(5) Retired from the Board 31 December 2008

In addition to Board meetings, the senior management meet regularly to discuss management issues relating to the Group.

There is a division of responsibilities between the Executive Chairman, who is responsible for the overall strategy of the Group, and the Chief Executive Officer, who is responsible for implementing the strategy and day-to-day running of the Group. He is assisted by the senior management team. The Board has approved a written statement of the division of responsibilities between the Executive Chairman and the Chief Executive Officer.

The Non-Executive Directors may seek information from any employee of the Group and obtain external professional advice at the expense of the Company if considered necessary.

The Company has arranged appropriate insurance cover in respect of legal action against its Directors and officers. Since August 2007, the Company has granted indemnities to each of the Directors and other senior executives, uncapped in amount but subject to applicable law, in relation to certain losses and liabilities which they may incur in the course of acting as Directors or employees of the Company or of one or more of its subsidiaries or associates.

The Non–Executive Directors fulfil a key role in corporate accountability. The remits and membership of the Audit and Remuneration Committees of the Board are set out below. The terms of reference of the Committees can be obtained by contacting the Company Secretary at the Registered Office.

The Board is assisted by the following Committees:

The Audit Committee is Chaired by Malcolm Cooper. The Committee’s other members are Thomas Lundqvist and Christopher Jarvis. Christopher Jarvis was appointed to the Committee on 31 December 2008. Anders Böös ceased to be a member of the Committee on 2 May 2008 and James Dean stepped down as a member of the Committee following his retirement on 31 December 2008. The Board is satisfied that Malcolm Cooper has recent and relevant financial experience for the purposes of provision C.3.1 of the Code, but notes that as Thomas Lundqvist is deemed not to be independent the Company does not comply with the composition of the Committee contained therein. As referred to above, the composition of the Committee will be reviewed once a suitable independent non-executive candidate has been identified.

The Committee has met three times during the year. The Chief Executive Officer, Group Director – Financial Control and Reporting and external auditor are normally invited to attend the meetings.

The principal duties of the Committee are to review the half-yearly and annual financial statements before their submission to the Board and to consider any matters raised by the auditors. The Committee also reviews the Interim Management Statements of the Company and the independence and objectivity of the auditors, taking into account relevant professional and regulatory requirements and the relationship with the auditors as a whole, including the provision of any non-audit services. The terms of reference of the Committee reflect current best practice, including authority to:

• Recommend the appointment, re-appointment and removal of the external auditor
• Ensuring the objectivity and independence of the auditors including occasions when non-audit services are provided by monitoring fees and letters of engagement
• Ensure appropriate ‘whistle-blowing’ arrangements are in place

During the year the Committee formally reviewed the interim and annual reports and associated interim and preliminary year-end results announcements, focusing on key areas of judgement and complexity, critical accounting policies and any changes required to those.

The Committee also met with the Group’s valuers, Allsop & Co and DTZ, to discuss methodology to be utilised for the bi-annual valuations of the Group’s properties.

Due to the relatively low number of personnel employed within the Group, the nature of the business and the current control and review systems in place, the Board has decided not to establish a separate internal audit department.

The Remuneration Committee comprises two Non-Executive Directors. Thomas Lundqvist was appointed Chairman of the Committee and Joseph Crawley was appointed as Member of the Committee, both following the retirement of James Dean on 31 December 2008. The Board has considered the Code’s recommendation that the Remuneration Committee should be formed of three Non-Executive Directors however it believes that given the structure of the Board and the relative size of the Company’s business, the purposes of the Committee are best achieved by the appointed two Non-Executive Directors. The Remuneration Committee has met formally once but held various other informal discussions during the year. The Committee considers the employment and performance of individual Executive Directors and determines their terms of service and remuneration. It also has authority to grant options under the Company’s Executive Share Option Scheme and Company Share Option Plan, although no options were granted during the year. The Committee meets at least once a year. The Board notes that as both Thomas Lundqvist and Joseph Crawley are deemed not to be independent, the Company does not comply with the composition of the Committee contained in provision B.2.1 of the Code. As referred to above, the composition of the Committee will be changed once a suitable independent non-executive candidate has been identified. Full details of the Committee’s work are given in the Remuneration Report on pages 35 to 39 of the 2008 Annual Report & Accounts.

The Board of Directors has considered the appointment of a separate Nomination Committee, as recommended by the Code, however due to the size and nature of the Company, this function is carried out by the Executive Chairman and other Directors, Non-Executive and Executive, as appropriate for each appointment being considered.

The Board acknowledges that the Directors are responsible for the Group’s system of internal control and have established procedures which are designed to provide reasonable assurance against material misstatement or loss. These procedures have operated for the entire financial year and up to the date of approval of the Annual Report and Accounts. The Directors have reviewed the effectiveness of the system of internal control for the period. The Directors have recognised that such a system can only provide a reasonable and not absolute assurance that there has been no material misstatement or loss. The key elements of the process by which the system of internal control is monitored are as follows:

• The risks which the Group faces or is likely to face are reviewed on an ongoing basis throughout the financial year and up to the publication of the annual report and accounts, in line with the revised Turnbull Guidance, in Board and executive meetings
• The control mechanisms for each identified risk are reviewed regularly
• Problems which arise are reviewed to determine whether they could have been avoided or their effect mitigated through improved control procedures
• The risk and control features of new projects are assessed as they arise
• The Audit Committee considers any internal control issues raised by the external auditors or management

The Board has not identified any significant internal control weaknesses during the financial year and therefore no remedial action has been necessary.

Set out on pages 5 to 18 of the 2008 Annual Report & Accounts is the description of the Group’s operations and the strategy which it employs to maximise returns and minimise risks. Quarterly and annual budgets are prepared for each area and monitored. Parameters have been established for investment decisions to be referred to the Board for approval. Three-yearly rolling cash flows are updated and distributed weekly and appropriate expenditure authorisation procedures have been adopted.

The Directors are responsible for preparing the Annual Report, Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the IAS Regulation to prepare the Group financial statements under IFRSs as adopted by the European Union. The Group financial statements are also required by law to be properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.

International Accounting Standard 1 requires that IFRS financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and presentation of financial statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However Directors are also required to:

• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
The Directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The parent company financial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors confirm that to the best of their knowledge the Financial Statements comply with the above requirements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the parent company financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors responsibility statement
We confirm to the best of our knowledge:
• the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and
• the Business Review, together with the table of risks and uncertainties which are incorporated into the Directors Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

The Group issues full annual financial report and accounts along with half-yearly financial reports to each of its shareholders. In addition, all press releases are included on the Company’s website at www.clsholdings.com on the Press Centre, “Press Centre” and “Regulatory News” pages.

The Chairman, the Chief Executive Officer and other senior management have regular meetings with institutional shareholders. All shareholders have at least 20 working days’ notice of the Annual General Meeting at which all Directors are introduced and available for questions. All shareholders are welcome to attend the Company’s Annual General Meeting and to arrange individual meetings by appointment. The views received at such meetings are fed back to the Board.

The proxy forms for the Annual General Meeting and General Meetings which were held in 2008 included a “vote withheld” box. Details of the proxies lodged for these meetings were announced to the London Stock Exchange and are on the Company’s website at www.clsholdings.com on the Press Centre, “Regulatory News” page.

This Corporate Governance report applies to the Company and its subsidiaries. It does not include joint ventures or associates.

By order of the Board


Thomas J Thomson
Company Secretary
14 April 2009