# EDGAR Filing Document

**Accession Number:** 0000845982
**File Stem:** 0001558370-23-002851
**Filing Date:** 2023-3
**Character Count:** 553242
**Document Hash:** f763ad25b1175c5b816596c84d0d0506
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001558370-23-002851.hdr.sgml**: 20230306

**ACCESSION NUMBER**: 0001558370-23-002851

**CONFORMED SUBMISSION TYPE**: 6-K

**PUBLIC DOCUMENT COUNT**: 2

**CONFORMED PERIOD OF REPORT**: 20230306

**FILED AS OF DATE**: 20230306

**DATE AS OF CHANGE**: 20230306

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** SMITH & NEPHEW PLC
- **CENTRAL INDEX KEY:** 0000845982
- **STANDARD INDUSTRIAL CLASSIFICATION:** ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842]
- **IRS NUMBER:** 000000000
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 6-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-14978
- **FILM NUMBER:** 23707723

**BUSINESS ADDRESS:**
- **STREET 1:** BUILDING 5, CROXLEY PARK
- **STREET 2:** HATTERS LANE
- **CITY:** WATFORD, HERTFORDSHIRE
- **STATE:** X0
- **ZIP:** WD18 8YE
- **BUSINESS PHONE:** 44 (0) 1923 477 100

**MAIL ADDRESS:**
- **STREET 1:** BUILDING 5, CROXLEY PARK
- **STREET 2:** HATTERS LANE
- **CITY:** WATFORD, HERTFORDSHIRE
- **STATE:** X0
- **ZIP:** WD18 8YE

------

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 6-K**

**Report of Foreign Private Issuer**

**Pursuant to Rule 13a-16 or 15d-16 of the**

**Securities Exchange Act of 1934**

March 6, 2023

Commission File Number 001-14978

**SMITH & NEPHEW plc**

(Registrant's name)

**Building 5, Croxley Park, Hatters Lane, Watford, England, WD18 8YE**

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F <u>a</u> &nbsp;&nbsp;&nbsp;&nbsp; Form 40-F __

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

Yes <u> </u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <u>a</u>

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

Yes <u> </u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <u>a</u>

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2 (b) under the Securities Exchange Act of 1934.

Yes <u> </u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <u>a</u>

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with <u>Rule 12g3-2 (b)</u> : 82- *n/a*.

------

INFORMATION CONTAINED IN THIS REPORT ON FORM 6-K

On March 6, 2023, Smith & Nephew plc sent its annual report for fiscal year 2022 to its shareholders, which is attached hereto as Exhibit 99.1.

**Exhibit List**

---

| | | |
|:---|:---|:---|
| **Exhibit No.** |  | **Description** |
| 99.1 |  | [Annual Report for the year ended 31 December 2022](tmb-20230306xex99d1.pdf) |

---

------

#### SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

---

| | | |
|:---|:---|:---|
|  |  | **Smith & Nephew plc** |
|  |  | (Registrant) |
| Date: March 6, 2023 | By: | /s/ Helen Barraclough |
|  |  | Helen Barraclough |
|  |  | Company Secretary |

---

------

### Attached PDF Documents

**Attachment 1:** `tmb-20230306xex99d1.pdf`

Smith+Nephew

Annual Report 2022

Life Unlimited

## Contents

### Strategic report

| Our performance | IFC |
| --- | --- |
| Who we are | 4 |
| Chair's statement | 6 |
| Chief Executive Officer's review | 8 |
| Our business model | 14 |
| Key Performance Indicators | 16 |
| Financial review | 18 |
| Serving healthcare customers | 24 |
| Manufacturing and quality | 46 |
| Strengthening our Culture through leadership | 48 |
| For a healthy and sustainable future | 56 |
| Risk report | 69 |
| Our stakeholders | 80 |

### Governance

| Letter from the Chair | 84 |
| --- | --- |
| Board leadership and purpose | 86 |
| Nomination & Governance Committee report | 98 |
| Audit Committee report | 101 |
| Compliance & Culture Committee report | 108 |
| Engaging with stakeholders | 112 |
| Directors' Remuneration report | 116 |

### Accounts

| Statement of Directors' responsibilities | 147 |
| --- | --- |
| Independent auditor's UK report | 148 |
| Group income statement | 164 |
| Group statement of comprehensive income | 164 |
| Group balance sheet | 165 |
| Group cash flow statement | 166 |
| Group statement of changes in equity | 167 |
| Notes to the Group accounts | 168 |
| Company financial statements | 221 |
| Notes to the Company accounts | 223 |

### Other information

| Group information | 229 |
| --- | --- |
| Other information | 230 |
| Shareholder information | 240 |

## Our performance

**$5,215m**

Group revenue

| Reported | Underlying 1 |
| --- | --- |
| +0.1% | +4.7% |

**$450m -24%**

Operating profit

**$901m -4%**

Trading profit$^{1}$

**25.5¢ -57%**

Earnings per share (EPS)

**$581m -45%**

Cash generated from operations

**$345m -3%**

R&D investment

**37.5¢ Unchanged**

Dividend per share

**8.6% -280bps**

Operating profit margin

**17.3% -70bps**

Trading profit margin$^{1}$

**81.8¢ +1%**

Adjusted earnings per share$^{1}$(EPSA)

**$444m -46%**

Trading cash flow$^{1}$

**6.6% -150bps**

Return on invested capital$^{1}$(ROIC)

$^{1}$ These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

The images used throughout the report represent the ways that Smith+Nephew is taking the limits off living and helping patients live Life Unlimited. Images used are not photographs of our patients unless expressly indicated.

Smith+Nephew Annual Report 2022

STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

Physical health is never just about our body. It’s our mind, feelings and ambitions. When something holds us back, it’s our whole life on hold.

We’re here to change that, to use technology to take the limits off living, and help other medical professionals do the same.

So that farmworkers, athletes, grandads, parents and rugby players stare down fear, see that anything is possible, then go on stronger. Inspired by a simple promise. Two words that bring together all we do...

## Life Unlimited

To learn more about our purpose visit
www.smith-nephew.com

Smith+Nephew Annual Report 2022

1

![img-0.jpeg](img-0.jpeg)

2

Smith+Nephew Annual Report 2022

STRATEGIC REPORT  
GOVERNANCE  
ACCOUNTS  
OTHER INFORMATION

![img-1.jpeg](img-1.jpeg)

Our technology takes the limits off living

# Getting a farmer back to work

Life Unlimited

Smith+Nephew Annual Report 2022

3

Who we are

We are a leading portfolio medical technology company. We exist to restore people’s bodies and their self-belief.

19,000

Employees supporting healthcare professionals worldwide

121,963

Medical training sessions provided by Smith+Nephew in 2022

## Serving healthcare customers

We serve our markets through three global franchises of Orthopaedics, Sports Medicine & ENT and Advanced Wound Management.

### Orthopaedics

Orthopaedics includes an innovative range of Hip and Knee Implants used to replace diseased, damaged or worn joints, robotics-assisted and digital enabling technologies and services that empower surgeons, and Trauma & Extremities products used to stabilise severe fractures and correct hard tissue deformities.

![img-2.jpeg](img-2.jpeg)

### Sports Medicine & ENT

Our Sports Medicine & Ear, Nose and Throat (ENT) businesses offer advanced products and instruments used to repair or remove soft tissue. They operate in growing markets where unmet clinical needs provide opportunities for procedural and technological innovation.

![img-3.jpeg](img-3.jpeg)

### Advanced Wound Management

Our Advanced Wound Management portfolio provides a comprehensive set of products and services to meet broad and complex clinical needs, delivering on our mission to shape what is possible in wound care.

![img-4.jpeg](img-4.jpeg)

4

Smith+Nephew Annual Report 2022

SYMPTOM REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

## Building a winning culture

We strive to build a purpose-driven culture based on strong and authentic values of Care, Courage and Collaboration.

» **Care:** A culture of empathy and understanding for each other, our customers and patients.
» **Courage:** A culture of continuous learning, innovation and accountability.
» **Collaboration:** A culture of teamwork, based on mutual trust and respect.

## Working with integrity, transparency and accountability

» **Innovation:** Developing new technology through our Research & Development (R&D) programme, and acquiring exciting technologies where we can add value. 75
» **Medical education:** Supporting the safe and effective use of our products and providing opportunities to learn innovative surgical techniques. 76-77
» **Sustainability:** Addressing the requirements of our stakeholders, creating a lasting positive difference for our customers and minimising our impact on the environment. 56-68

## Improving outcomes across the globe

![img-5.jpeg](img-5.jpeg)

100+

A presence in more than 100 countries

5+

Smith+Nephew's Academies provide medical education in the US, Europe and Asia Pacific

Global Head Office
Major manufacturing sites
Smith+Nephew Academies
Smith+Nephew Academy opening in 2023

Smith+Nephew Annual Report 2022

5

Chair's statement

![img-6.jpeg](img-6.jpeg)

# Focused on improving performance and shareholder value

Dear Shareholder
Smith+Nephew delivered a mixed performance in 2022. Revenue growth was in the upper half of our guided range for the year, but our trading profit margin was below expectations, primarily due to the significant number of macro factors which impacted our industry in 2022. Under the leadership of our new Chief Executive Officer, Dr Deepak Nath, the management team is working to realise maximum value from the opportunities we have built, and address the challenges. We believe we are on the path to sustained higher revenue growth while also improving our trading profit margin over time.

## Focused on improvement

The Board feels that the Company, under new leadership, has a renewed energy and all Board members strongly support the actions being taken to move the Company forward, including to address performance in our Orthopaedics franchise and improve productivity to support margin expansion.

37.5¢

Dividend per share

Read about our Memphis visit

Read about our culture

6

Smith+Nephew Annual Report 2022

STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

The Board seeks to foster an environment where there is a shared urgency to see measurable improvements in performance whilst recognising that leadership needs time to effect lasting positive change.

We reviewed and endorsed the 12-point plan brought forward by Deepak and his leadership team, welcoming the deep root-cause analysis, focused programme of actions, pace of execution and commitment to demonstrable outcomes. The Board regularly monitors progress and is encouraged by the early successes which Deepak describes in the next few pages.

### Shareholder value

Stock markets were challenging in 2022, and Smith+Nephew's share price reflected this as well as our recent performance. While our shares performed in line with or better than many of our European medtech peers during the year, we continued to lag behind our US counterparts. Delivering our commitments with urgency to deliver value to our shareholders is a priority for the Board and management team.

For 2022 the Board is recommending a Final Dividend of 23.1¢ per share. Together with the Interim Dividend of 14.4¢ per share this will give a total distribution of 37.5¢ per share, unchanged from 2021.

The Board welcomes discussion with shareholders and during the year we engaged with many of our larger investors. We also received regular communication from private shareholders and welcomed the opportunity to meet face-to-face at our Annual General Meeting (AGM), which was also live-streamed to enable maximum participation during the meeting.

### Culture and sustainability

The Board puts great value on how Smith+Nephew operates, and invests considerable time in meeting employees and understanding their experience and commitment to the Company.

Read about
Governance

Link to
AGM

Smith+Nephew Annual Report 2022

“The Board feels that the Company, under new leadership, has a renewed energy and all Board members strongly support the actions being taken to move the Company forward.”

During the year members of the Board met with employees, both virtually and in person, and were impressed by their enthusiasm for the work they do. In September, the Board had the opportunity to meet with employees at the Company's Memphis site and learn about both our exciting product portfolio and scrutinise our plans to improve manufacturing productivity.

The Board was pleased to see that external benchmarking highlighted a strong employee connection to the purpose of Life Unlimited and an overall upward trend in engagement compared with last year. Management continues to work to build the culture and during the year the Board approved new Commitments which define the specific ways in which the Company expects employees to demonstrate our culture every day. On behalf of the whole Board I would like to take this opportunity to thank all the employees for their contributions during 2022.

Sustainability has continued to receive focus and scrutiny from the Board and its Committees to ensure our sustainability programme is aligned with our stakeholders' expectations and to monitor actions and progress against our targets, including towards net zero carbon emissions by 2045. We welcomed the decision to strengthen executive oversight of sustainability with the creation of the ESG Operating Committee, formed in January 2023, comprising experienced executives from across many Smith+Nephew functions.

### Reflections and thanks

As this will be my final year on the Board and as your Chair, I wanted to take the opportunity to reflect on events during my time at Smith+Nephew. In 2014 when I was formally appointed as Chair, no one had any indication of the scale of the global challenges and uncertainty we would all come to experience, in terms

of political and geographical upheaval, the pandemic and the impact it would have on our economies, supply chains and ways of working.

During the early years of my tenure, I was privileged to have been part of driving the growth and success achieved by the Company. The Board supported the Company's strategic expansion into higher growth markets and segments through organic growth and acquisition, all guided by the renewed purpose, enthusiasm and winning culture of Life Unlimited.

However, my time as Chair has not been without its disappointments. As a Board, we have always made every effort to support the Company through the changes required to deliver value and growth for all stakeholders and to enable the Company to achieve its full potential. The loss of momentum emerging from the pandemic was something that the Board was very keen to address with the appointment of Deepak in April 2022 to accelerate business recovery. The Board have been impressed with the way that Deepak has quickly made every effort to evaluate, analyse and improve the business at pace in alignment with the purpose, strategy and values of the Company.

I will retire as Chair of Smith+Nephew in 2023 with a proposed transition over the next few months to our new Chair, Rupert Soames OBE, subject to shareholder approval. I firmly believe the management alignment and focus on execution at pace, the strong culture embedded within the organisation, and our leading portfolio of innovation together give Smith+Nephew the platform to deliver its full potential.

**Roberto Quarta**
Chair

7

Chief Executive Officer's review

# Transforming to consistently higher growth

Dear Shareholder

It was an honour to be appointed Chief Executive Officer in April 2022 and I am pleased to have this opportunity to review the last year, and outline what we are doing to transform performance at Smith+Nephew.

When I joined Smith+Nephew I found a company that had many more opportunities than challenges, despite the backdrop of a difficult macro environment, including the impacts of higher inflation, war in Ukraine and Covid in China.

We are a company with innovation at our core, with leading technology across the business. We have a strong, energised management team and employees who are deeply committed to our purpose of Life Unlimited. Together, we are working to improve our execution to realise our opportunities and deliver greater value for our customers, investors, employees and other stakeholders.

We delivered 4.7% underlying revenue growth1 in 2022 (0.1% reported), operating profit margin of 8.6% and a trading profit margin1 of 17.3%. Performance in Orthopaedics and manufacturing and supply chain, alongside the difficult macro environment, held back our growth and trading profit margin during the year. We worked hard to closely manage the impact of the widely reported global shortages of some raw materials and components. We are benefitting from our increased investment in innovation, with more than 60% of growth in 2022 coming from products launched in the last five years. We exited the year with good momentum, with all three global franchises contributing to a strong finish to the year, and all accelerated revenue growth over the first nine months.

## Executing our 12-point plan

In July 2022 we announced a 12-point plan to fundamentally change the way Smith+Nephew operates, to drive higher growth and improve productivity, maximising the opportunities we have built, and addressing the challenges. Through this plan, we expect to accelerate delivery of our Strategy for Growth and deliver on our ambition to transform to a consistently higher-growth company.

Our Strategy for Growth is based on three pillars:

- First, **Strengthen** the foundations of Smith+Nephew. A solid base in commercial and manufacturing will enable us to serve customers sustainably and simply, and deliver the best from our core portfolio.
- Second, **Accelerate** our growth profitably, through more robust prioritisation of resources and investment, and with continuing customer focus.
- Third, continue to **Transform** ourselves for higher long-term growth, through investment in innovation and acquisitions.

The 12-point plan supports the growth pillars to Strengthen and Accelerate, and is focused on:

- **Fixing Orthopaedics**, to regain momentum across hip and knee implants, robotics and trauma, and earn market share with our differentiated technology;
- **Improving productivity**, to support trading profit margin expansion; and
- Further **accelerating growth** in our already well-performing Advanced Wound Management and Sports Medicine & ENT.

Read about our CORI® Surgical System

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

8

Smith+Nephew Annual Report 2022

STRATEGIC REPORT  
GOVERNANCE  
ACCOUNTS  
OTHER INFORMATION

Since July we have embedded the teams and structures to drive this work, established internal KPIs to drive accountability, and have made meaningful early progress in delivery. We expect to continue to accumulate operational and financial benefits as we progress through the two-year life of the plan.

While there is still much work to be done to improve our performance in Orthopaedics we are pleased with our progress in the first few months, including reducing our overdue orders by 35% from the peak in the first half of the year and improving the percentage of customer orders that are completely filled, moving towards normal industry standards.

In our global operations, we opened a new high technology orthopaedics manufacturing facility in Malaysia. We also announced plans for a new Advanced Wound Management facility in the UK. Further benefits are expected to come from driving lean methodologies across our manufacturing operations, pursuing opportunities for additional network optimisation and targeting direct procurement savings.

Our Advanced Wound Management franchise has delivered above market performance since 2021 following extensive work to improve commercial execution, and we expect to build on this strong position going forward. Growth drivers include our portfolio breadth and extensive evidence-base. Both are differentiators and we see significant opportunities for further growth, particularly in Negative Pressure Wound Therapy.

![img-0.jpeg](img-0.jpeg)

Read about our  
REGENETEN®  
Bioinductive Implant

©2022-Notified-Annual Report 2022

![img-1.jpeg](img-1.jpeg)

9

Chief Executive Officer's review continued

# The 'What' of our strategy

![img-2.jpeg](img-2.jpeg)

# The 'How' - Executing our 12-point plan

# Fixing Orthopaedics

Fixing Orthopaedics, to regain momentum across hip and knee implants, robotics and trauma, and win share with our differentiated technology:

- Rewire Orthopaedics commercial delivery.
- Earn market share with our technology.
- Streamline our reconstruction portfolio.

# Improving productivity

Improving productivity, to support trading profit margin expansion:

- Improve value and cash processes.
- Optimise procurement.
- Manufacturing optimisation.

# Accelerating Sports Med and AWM

Further accelerating growth in our already well-performing Advanced Wound Management and Sports Medicine & ENT businesses, representing approximately 60% of Group revenue:

- Scale Negative Pressure Wound Therapy.
- Drive cross-selling in Ambulatory Surgery Centers (ASCs).

# The 'Now' of the opportunity

- More opportunities than challenges.
- Multiple positive factors coming together in Orthopaedics.
  - Next wave of innovative implants coming to market.
  - Unique expansions for CORI.
  - Revitalised management team in place.
  - Rewiring our commercial delivery underway.
- Reinforcing our AWM and Sports Medicine leadership positions.
- Bringing together leading technology and execution to drive performance.

Our Sports Medicine business has delivered above market growth consistently for many years, building on our reputation for innovation. Many of the drivers for further growth are already in place, including expanding both our REGENETEN® biologics platform into new indications and our technology leadership by adding advanced surgical capability onto our surgical tower. For ENT, we have a favourably positioned tonsil and adenoid business and are in the early stages of the roll-out of our unique Tula® System for in-office delivery of ear tubes.

We expect to continue to deliver further operational and financial benefits as we progress through the two-year life of the plan.

# Innovation-led

Our commitment to innovation is central to our Strategy for Growth and we continued to invest behind recent product launches and in our R&D programme as well as clinical evidence to drive future growth.

New product launches in Orthopaedics included expanding our robotics-enabled CORI® Surgical System by bringing both cementless total knee and total hip arthroplasty onto the platform. We also became the first company to receive FDA 510(k) clearance for a revision knee indication using a robotics-assisted platform and completed the first cases on CORI. Revisions account for around 10% of all knee procedures in the US.

In Sports Medicine, we announced encouraging evidence supporting REGENETEN, which delivered a significant 86% reduction in rotator cuff re-tear rates at 12 months in interim results from a randomised controlled trial (see page 37).

Read about our KPIs

10

Smith+Nephew Annual Report 2022

STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

“In July 2022 we announced a 12-point plan to fundamentally change the way Smith+Nephew operates, to drive higher growth and improve productivity.”

In Advanced Wound Management, we introduced the WOUND COMPASS® Clinical Support App, a comprehensive digital support tool for healthcare professionals that aids wound assessment and decision making to help reduce practice variation, and launched our DURAMAX® S Silicon Super Absorbent Dressing for high exuding wounds in Europe, where superabsorbers are one of the fastest growing categories of dressings.

We continued to deliver successful acquisitions, bringing novel and disruptive technologies into our portfolio. In January 2022 we acquired Engage Surgical, owner of the only cementless partial knee system commercially available in the US. The system will have an application on CORI in the future.

Finally, we made further investment behind medical education. I was proud to attend the opening of a new Smith+Nephew Academy in Singapore. Our Academies in the US, Europe and now Asia Pacific, as well as our online resources, provide tens of thousands of healthcare professionals with opportunities to evaluate the latest evidence, learn innovative clinical techniques as well as safe and effective use of our products through hands-on and state-of-the-art digital interactive learning experiences.

### Building a winning culture

Our strong culture and connection to our purpose of Life Unlimited helped us navigate the challenges of 2022. We improved our employee engagement scores as measured by Gallup, and made good progress in building a diverse and inclusive workplace through our Employee Inclusion Groups (EIGs). I have spent time with employees at many of our sites and through our global town hall meetings, and was impressed by their welcome and the enthusiasm to go the extra mile to serve our customers. I would like to thank every one of our colleagues for their dedication and care.

We continue to work to build our culture, and to ensure it supports our Strategy for Growth, and during the year we defined the specific expectations and behaviours we believe are needed, introducing our Commitments. We also took steps to support our employees as the cost of living rose sharply in some of our locations. You can read more about these and other initiatives on pages 48-53.

### Supporting Net Zero

Our Strategy for Growth also embraces sustainability, and this report details our progress made against our commitment to achieve net zero carbon emissions by 2045. Our Scope 1 and Scope 2 greenhouse gas emissions were independently assured in 2022 and we have reported our 2021 baseline Scope 3 emissions for eight categories. We are developing our Scope 3 emissions reduction roadmap in preparation for submitting this to the Science Based Target Initiative (SBTi) for validation. You can read more about our progress across our sustainability focus areas of People, Planet and Products on pages 59-63.

### Transforming Smith+Nephew

We will continue to face macroeconomic headwinds in 2023. However, I believe the drivers of further growth are in place, including leading technologies across all three franchises. With our 12-point plan, we are fundamentally changing the way Smith+Nephew operates to drive higher growth and improve productivity. Overall, we expect to deliver both faster revenue growth and margin expansion in the coming year, and are setting a solid foundation for our midterm ambitions as we transform to a consistently higher growth company.

**Deepak Nath, PhD**
Chief Executive Officer

Read about our
WOUND COMPASS
Clinical Support App

![img-3.jpeg](img-3.jpeg)

Smith+Nephew Annual Report 2022

11

![img-4.jpeg](img-4.jpeg)

12

Smith+Nephew Annual Report 2022

STRATEGIC REPORT

GOVERNANCE

ACCOUNTS

OTHER INFORMATION

Our technology takes the limits off living

# Helping an athlete back to competing

Life Unlimited

Smith+Nephew Annual Report 2022

13

Our business model

# How we create value

Through our business model we strive to transform outcomes for the patients we serve, for clinicians and the healthcare systems we support, for the company and our shareholders. Our Strategy for Growth focuses our efforts, and our purpose of Life Unlimited inspires us every single day.

## What we need to create value

### People

A purpose-driven culture based on authentic values committed to doing business the right way.

### Sustainability

Addressing the long-term needs of our customers, employees, communities and stakeholders, reducing our impact on the environment.

### R&D

Innovation is at the heart of our business and we prioritise investment in new products, technologies and services.

### Global operations

Resilient manufacturing and supply chains to ensure quality and competitiveness.

### Financial strength

A robust balance sheet and capital allocation framework balancing investments in the future and returns today.

### Medical education

Committed to educating and training healthcare professionals on the safe and effective use of our products.

## Delivering value for stakeholders

### Investors

Dividend

$327m

Group revenue

$5,215m

+0.1%

Operating profit

$450m

-24%

### Community

Volunteer hours

11,500

### Employees

Engagement score

4.12

+0.04

Operating profit margin

8.6%

-280bps

Trading profit1

$901m

-4%

Trading profit margin1

17.3%

-70bps

### Customers

Training sessions

121,963

Product launches

12

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

14

Smith+Nephew Annual Report 2022

STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

# How we create value

![img-5.jpeg](img-5.jpeg)

Smith+Nephew Annual Report 2022

15

Key Performance Indicators

# Measuring our progress

Smith+Nephew uses a number of financial and non-financial Key Performance Indicators (KPIs) to track and evaluate performance and delivery against its Strategy for Growth and other business objectives. Those KPIs in the public domain are consolidated below. A number of other KPIs are commercially sensitive and are not published but are used internally to drive performance and growth.

## Financial Key Performance Indicators

### Revenue growth

Revenue growth allows management and investors to measure our relative performance. We are targeting underlying revenue growth of 5%+ in the medium term.

Revenue growth - reported

**+0.1%**

Reported revenue growth includes a foreign exchange headwind of 460bps.

![img-6.jpeg](img-6.jpeg)

Revenue growth - underlying1

**+4.7%**

All franchises and geographies delivered revenue growth in 2022.

![img-7.jpeg](img-7.jpeg)

### Dividend per share

Dividend payments allow investors to receive a cash return on their investment in Smith+Nephew.

**37.5¢**

Total distribution of 37.5¢ per share, unchanged from 2021.

![img-8.jpeg](img-8.jpeg)

### Profit margin

Profit margin allows management and investors to determine our relative performance. We are targeting at least a 20% trading profit margin in 2025, with improvements year-on-year.

Operating profit margin

**8.6%**

Reported profit margin reflects restructuring costs, as well as acquisition and disposal-related items, amortisation and legal and other items.

![img-9.jpeg](img-9.jpeg)

Trading profit margin1

**17.3%**

Trading profit margin reflects the impact of higher input inflation in 2022.

![img-10.jpeg](img-10.jpeg)

### Return on invested capital1

ROIC allows management and investors to measure the return generated on capital invested, providing a metric for long-term value creation.

**6.6%**

The lower ROIC reflected the fall in operating profit and higher average net operating assets.

![img-11.jpeg](img-11.jpeg)

### 12-point plan KPIs

Multiple KPIs are used to measure delivery against the 12-point plan. These examples express some of the process improvement elements of the plan. KPIs covering R&D and growth elements, such as a new product acceleration metric, are commercially sensitive and not disclosed externally.

Orthopaedics non-set line-item fill rate

**16**

Percentage point improvement in the US year-on-year to 31 December 2022

This KPI helps us track improving performance in filling customer orders.

Orthopaedic Reconstruction set turns

**23%**

Improvement from 2021 baseline

This KPI helps us measure improvements in utilisation of Orthopaedic Reconstruction surgical instrument sets, enabling more procedures and supporting sales.

Procurement improvements

**0%**

Reduction since 2022 peak

This KPI enables us to track our productivity by measuring our success reducing direct and indirect spend (including transportation) as a percentage of revenue.

Manufacturing conversion cost

**95bps**

Reduction since 2022 peak

This KPI measures the cost to convert raw materials to finished products as a percentage of revenue to track manufacturing efficiency improvements.

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

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48-49

For more about our employee engagement score

56-59

For more about our sustainability strategy

# Non-financial Key Performance Indicators

# Investment in innovation

This KPI allows management and investors to understand how much is being invested in new innovative products designed to drive future revenue growth and profit.

R&D investment

$345m

In 2022, we continued to protect our R&D investment and launched multiple new products from our organic pipeline and acquisitions.

![img-12.jpeg](img-12.jpeg)

New product launches

12

This KPI helps us track the number of on-time new product launches to drive future revenue growth.

Acquisitions

1

This KPI tracks acquisitions that enhance our portfolio and pipeline, including technology that can change the standard of care and assets in high-growth categories.

In January 2022, we acquired Engage Surgical, owner of the only cementless partial knee system commercially available in the US. This gives us a unique position as the only company offering total and partial cemented and cementless knees in the US, our largest market.

# Employee engagement score

The Gallup Global Engagement Survey allows management and investors to assess how engaged our employees are, which is a key driver of business performance.

Engagement

4.12

Our Grand Mean score of 4.12 positioned us in the 73rd percentile in Gallup's database (2021: 71st percentile). 88% of employees participated.

# Quality and safety

This KPI allows management and investors to verify that we are operating a safe working environment at high standards.

Headline safety rate

We adopt the industry-standard OSHA system to record incidents of occupational injury and ill health. Performance is expressed as the number of incidents per 200,000 hours worked.

![img-13.jpeg](img-13.jpeg)

# Medical education

This KPI helps investors understand how we support the safe and effective use of our products through the provision of medical education.

Practitioner training sessions

121,963

28-37

For more about medical education

# Long-term sustainability targets

These KPIs allow management and investors to measure progress against our long-term sustainability targets in the three areas of People, Planet and Products.

Achieve net zero

Achieve net zero Scope 1 and Scope 2 greenhouse gases (GHGs) by 2040 and Scope 3 GHGs by 2045, beginning by achieving a 70% reduction in Scope 1 and Scope 2 GHGs by 2025.

Scope 1 and 2 (market-based)^

27%

Reduction since 2019.

Hours volunteered

11,500

Each year employees are encouraged to use paid volunteering time.

Waste to landfill

26%

Less waste to landfill versus 2019.

Product donations

$5.0m

Each year we donate products to support underserved communities.

^ Please refer to page 67 for our emissions reporting methodology, materiality and scope

56-60

For details of the actions we are undertaking to meet our commitments

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Financial review

![img-14.jpeg](img-14.jpeg)

## Building a stronger Smith+Nephew

**We made good progress in 2022 as we focused on driving better execution and improving productivity.**

### 2022 performance

Group revenue in 2022 was $5,215 million, an increase of 0.1% on a reported basis and 4.7% on an underlying basis1 excluding a 460bps headwind from foreign exchange, within the revenue guidance range of 4.0% to 5.0% we had provided for 2022.

We exited the year with good momentum, with fourth quarter revenue up 1.4% on a reported basis and 6.8% on an underlying basis1 excluding a 540bps foreign exchange headwind. All three global franchises contributed to this strong finish to the year, with all accelerating revenue growth over the first nine months of the year.

The operating profit was $450 million with an operating profit margin of 8.6% (2021: 11.4%) after acquisition and disposal related items, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles and legal and other items.

Trading profit1 for 2022 was $901 million (2021: $936 million) with a trading profit margin1 of 17.3% (2021: 18.0%) reflecting higher inflation in freight and logistics, the impact of China volume-based procurement (VBP), as well as sales and marketing expenditure levels returning to more normal levels. The trading profit margin1 was below the updated guidance of 17.5% we gave on 28 July 2022.

The reported profit before tax was $235 million (2021: $586 million) after adjusting for an impairment loss of $109 million in our investment in our associate, B oventus.

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## Group performance

|  | 2022 $ million | 2021 $ million | Change $ million |
| --- | --- | --- | --- |
| Revenue | 5,215 | 5,212 | 3 |
| Operating profit | 450 | 593 | (143) |
| Trading profit 1 | 901 | 936 | (35) |
| Profit before tax | 235 | 586 | (351) |
| Attributable profit | 223 | 524 | (301) |
| EPS | 25.5¢ | 59.8¢ | (34.3)¢ |
| EPSA 1 | 81.8¢ | 80.9¢ | 0.9¢ |

## Non-IFRS measures

The underlying increase in revenue by market reconciles to reported growth, the most directly comparable financial measure calculated in accordance with International Financial Reporting Standards (IFRS), as follows:

|  | 2022 $ million | 2021 $ million | Reported growth % | Underlying growth % | Acquisitions/ Disposals % | Reconciling items Currency impact % |
| --- | --- | --- | --- | --- | --- | --- |
| US | 2,764 | 2,658 | 4.0 | 4.0 | - | - |
| Other Established Markets 2 | 1,504 | 1,638 | (8.2) | 3.3 | - | (11.5) |
| Total Established Markets | 4,268 | 4,296 | (0.7) | 3.7 | - | (4.4) |
| Emerging Markets | 947 | 916 | 3.5 | 9.1 | - | (5.6) |
| Total | 5,215 | 5,212 | 0.1 | 4.7 | - | (4.6) |

Trading profit$^{1}$ reconciles to operating profit, the most directly comparable financial measure calculated in accordance with IFRS, as follows:

|  | 2022 $ million | 2022% | 2021 $ million | 2021% |
| --- | --- | --- | --- | --- |
| Operating profit | 450 | 8.6 | 593 | 11.4 |
| Acquisition and disposal related items | 4 | 0.1 | 7 | 0.1 |
| Restructuring and rationalisation costs | 167 | 3.2 | 113 | 2.2 |
| Amortisation and impairment of acquisition intangibles | 205 | 4.0 | 172 | 3.3 |
| Legal and other | 75 | 1.4 | 51 | 1.0 |
| Trading profit 1 | 901 | 17.3% | 936 | 18.0% |

“For the midterm, the Group is focused on delivering consistently higher revenue growth while also expanding its trading profit margin.”

## Efficiency

In July 2022, we announced a 12-point plan to improve execution and drive our Strategy for Growth. The plan focuses on fixing Orthopaedics, improving productivity, and accelerating growth in Advanced Wound Management and Sports Medicine.

We are making good progress embedding the plan and are seeing early improvements.

The efficiency and productivity elements of the 12-point plan bring in a range of actions across the areas of cost of goods from our Global Operations and sales & marketing and general & administrative costs from our commercial and corporate activities. In aggregate, the benefits from these actions are expected to result in more than $200 million of annual savings by 2025. The work to finalise the associated cost is ongoing and will be reported alongside our Q1 results on 26 April 2023.

## Earnings per share

Basic earnings per share ('EPS') was down 57% to 25.5¢ primarily due to an impairment loss in our investment in our associate, Bioventus. Adjusted earnings per share$^{1}$('EPSA') was up 1% at 81.8¢, reflecting the improved trading performance, lower trading tax rate$^{2}$ and lower number of outstanding shares due to the share buyback.

## Capital allocation

In December 2021 we announced an updated capital allocation policy to prioritise the use of cash as follows:

1. Invest in innovation to drive organic growth, and to meet our sustainability targets and further embed our ESG agenda.
2. Acquire new technologies and expand in higher growth segments, that have a strong strategic fit and meet our financial criteria.
3. Maintain investment grade credit metrics, our existing progressive dividend policy, and an optimal balance sheet position.
4. Return surplus capital to shareholders through buybacks.

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

2 Other Established Markets are Europe, Canada, Japan, Australia and New Zealand.

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## Financial review continued

The 2022 share buyback programme commenced on 23 February 2022 and $150 million was completed by 12 August 2022. As macroeconomic conditions continued to be uncertain, including higher inflation, the Board decided it was prudent to delay further buybacks until conditions improved. We remain committed to returning surplus cash to shareholders over time.

### Investments

In January 2022, we completed the acquisition of Engage Uni, LLC (operating as Engage Surgical), owner of the only cementless partial knee system commercially available in the US.

This acquisition strongly supports Smith+Nephew's Strategy for Growth by transforming our business through innovation and acquisition, while also providing differentiation for our customers. The maximum consideration, all payable in cash, is $135 million and the fair value consideration is $131 million and includes $32 million of contingent consideration.

We made further investment behind medical education with the opening of a new Smith+Nephew Academy in Singapore, a major medical education and digital innovation centre covering the Asia-Pacific region. The Group is planning to open a similar new Smith+Nephew Academy in Munich in 2023.

In 2022, we also announced plans to build a new Advanced Wound Management facility on the outskirts of Hull, UK. The design of the new facility takes into account sustainability factors and standards with a focus on energy and resource efficiency.

### Dividends

The 2021 final dividend of 23.1¢ per ordinary share, totalling $202 million, was paid on 11 May 2022. The 2022 interim dividend of 14.4¢ per ordinary share, totalling $125 million, was paid on 26 October 2022.

### Taxation

Smith+Nephew is subject to various taxes in the many countries in which the Group operates. We seek to pay the correct amount of tax in line with local tax laws in each jurisdiction.

|  | 2022 $ million | 2021 $ million | Change $ million |
| --- | --- | --- | --- |
| Goodwill and intangible assets | 4,267 | 4,387 | (120) |
| Other non-current assets | 1,843 | 2,109 | (266) |
| Current assets | 3,856 | 4,424 | (568) |
| Total assets | 9,966 | 10,920 | (954) |
| Total equity | 5,259 | 5,568 | (309) |
| Non-current liabilities | 2,992 | 3,221 | (229) |
| Current liabilities | 1,715 | 2,131 | (416) |
| Total liabilities | 4,707 | 5,352 | (645) |
| Total liabilities and equity | 9,966 | 10,920 | (954) |
| Net debt 2 including lease liabilities | 2,535 | 2,049 | 486 |

|  | 2022 $ million | 2021 $ million | Change $ million |
| --- | --- | --- | --- |
| Cash generated from operations | 581 | 1,048 | (467) |
| Trading cash flow 1 | 444 | 828 | (384) |
| Free cash flow 1 | 56 | 410 | (354) |

Our business generates tax receipts for the governments in each of these countries. In addition to corporate income taxes, we pay and collect other taxes including payroll (employee) taxes, sales (indirect) taxes and customs duties.

During 2022, we made global tax payments of $818 million (2021: $725 million). This comprised of $241 million of taxes borne by Smith+Nephew (corporate income taxes, employer social security contributions and customs duties) and $577 million of taxes collected from employees and customers on behalf of governments (employee income taxes and social security contributions and net indirect tax payable).

### Balance sheet data and net debt

Our balance sheet remains strong. Key movements are outlined below.

Overall goodwill and intangible assets decreased by $120 million. Goodwill increased by $42 million as a result of acquisitions of $84 million, which was partially offset by foreign exchange movements of $42 million.

Intangible assets decreased by $162 million primarily because of amortisation and impairment of $268 million and foreign currency movements of $14 million being partially offset by acquisitions of $44 million and additions of $77 million. The acquisition of intangible assets relates to the Engage acquisition.

Other non-current assets decreased by $266 million primarily due to a decrease of $58 million in property, plant and equipment, a $141 million decrease in investment in associates and a $41 million decrease in retirement benefit assets. The decrease in the investment in associates primarily relates to an impairment loss of $109 million in Bioventus Inc.

Current assets decreased by $568 million primarily due to a $940 million decrease in cash at bank, relating to the Engage Surgical acquisition, payment of dividends, share buybacks and repayment of debts. This was partially offset by a $361 million increase in inventories driven by strategic raw material buys, as part of managing disruption to certain global raw material and component supply, inflation raising the average value of our inventory, and increased inventory to support growth including new product launches, safety stock, or in markets where we expect growth acceleration.

Non-current liabilities decreased by $229 million primarily due to a $105 million reclassification of borrowings to current liabilities to reflect repayments due in 2023, and an increase in retirement benefit obligations primarily due to higher discount rates in 2022 to reflect the current economic environment.

Current liabilities decreased by $416 million primarily related to the repayment of $407 million debt in 2022 and movements in provisions.

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

2 Net debt is reconciled in Note 15 to the Group accounts.

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## Cash flow

Cash generated from operations was $581 million after paying out $22 million of acquisition and disposal related items, $120 million of restructuring and rationalisation expenses and $133 million for legal and other items.

Trading cash flow1 decreased by $384 million driven by adverse working capital movements, primarily from inventory including from spot buying of raw materials and components to secure supply and mitigate the risk of shortages, and as we continued to invest in capital expenditure, including progressing changes to our manufacturing network.

The free cash flow2 decreased to $56 million from $410 million in the prior year because of the decrease in trading cash flow. As a result of the working capital movement, the trading profit to cash conversion1 ratio deteriorated to 49% (2021: 88%). We expect a reduction in inventory levels, and for cash conversion to return to historic levels, as we deliver the 12-point plan.

In 2022, the Group purchased a total of 10.1 million ordinary shares at a cost of $158 million.

## Liquidity and capital resources

At 31 December 2022, the Group had access to $344 million (2021: $1,285 million) in cash net of bank overdrafts. The Group's debt facilities comprised a $1,000 million

USD corporate bond, a €500 million EUR corporate bond valued at $533 million, a $1,000 million revolving credit facility and $1,160 million of private placement debt. The Group had committed facilities of $3.7 billion at 31 December 2022 of which $2.7 billion was drawn.

The Group's net debt2 increased from $2,049 million at the beginning of 2022 to $2,535 million at the end of 2022, representing an overall increase of $486 million as a result of dividend payments ($327 million), the acquisition of Engage Surgical ($89 million), and share repurchases ($158 million).

## Return on invested capital

Return On Invested Capital (ROIC)3 is a measure of the return generated on capital invested by the Group. It encourages compounding reinvestment within the business and discipline around acquisitions. ROIC decreased from 8.1% in 2021 to 6.6% in 2022 due to lower operating profit and higher average net operating assets.

## Going concern

The Directors have considered various scenarios in assessing the future financial performance and cash flows. Throughout these scenarios, modelled on severe but plausible outcomes, the Group continues to have headroom on its borrowing facilities and financial covenants. The Directors have a reasonable expectation

that the Company and the Group are well placed to manage their business risks and to continue in operational existence for the period to 30 March 2024. Accordingly, the Directors continue to adopt the going concern basis in preparing the consolidated financial statements.

## Outlook

For 2023 we are targeting both revenue growth and trading profit margin above 2022 levels.

For revenue, we expect to deliver underlying revenue growth in the range of 5.0% to 6.0%. Within this, we expect continued strong growth from our Sports Medicine & ENT and Advanced Wound Management franchises, and further improvement in Orthopaedics as we continue to execute on the 12-point plan. On a reported basis the guidance equates to a range of around 5.0% to 6.0% based on exchange rates prevailing on 13 February 2023.

In terms of phasing, we expect the first quarter to be impacted by the renewed Covid waves in China reducing surgical-volumes, as well as the continuing headwind of VBP in Orthopaedics. We expect the business to accelerate from the second quarter for the remainder of the year.

For trading profit margin, we expect to deliver at least 17.5% as the positive operating leverage from revenue growth, productivity improvements and the early benefits of our cost-saving initiatives more than offset continuing macroeconomic headwinds from raw material cost inflation, higher wages and a 100bps headwind from transactional foreign exchange. The tax rate on trading results for 2023 is forecast to be around 19% subject to any material changes to tax law or other one-off items.

For the midterm, the Group is focused on consistently delivering higher revenue growth while also expanding its trading profit margin.

We are now targeting underlying revenue growth consistently 5%+ (previously 4-6%), driven by return on innovation investments and execution of the 12-point plan, and trading profit margin expansion to at least 20% in 2025, driven by productivity improvements (previously 21% in 2024).

**Anne-Françoise Nesmes**
Chief Financial Officer

## Available debt facilities by maturity date ($m)

![img-0.jpeg](img-0.jpeg)

1 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

2 Net debt is reconciled in Note 15 to the Group accounts.

3 ROIC is defined as: Operating profit (before amortisation and impairment of acquisition intangibles) less adjusted taxes/(Operating net operating assets + Closing net operating assets)/2.

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# Getting a grandad back to playing with his grandchild

Life Unlimited

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![img-1.jpeg](img-1.jpeg)

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# Serving healthcare customers

Our customers are healthcare professionals. They can range from orthopaedic surgeons to wound care nurses, general practitioners and other clinicians, but increasingly also economic stakeholders such as purchasing professionals in hospitals and healthcare insurers.

## Our franchise model

**Smith+Nephew has a global franchise structure with three franchises: Orthopaedics, Sports Medicine & ENT and Advanced Wound Management.**

The franchise model is designed to ensure that we have subject and market experts leading specialist teams dedicated to serving the specific requirements of our customers. Our franchises are responsible for strategy, determining which products we take to market. The franchises work closely with R&D to ensure we are developing products that address unmet needs and with Global Operations to ensure we have appropriate product availability to meet customer needs.

During 2022, our Orthopaedics and Sports Medicine & ENT were led by one leadership team under the President Orthopaedics, Sports Medicine & ENT and Americas, reporting to the Chief Executive Officer.

Advanced Wound Management was led by the President Advanced Wound Management and Global Commercial Operations, reporting to the Chief Executive Officer. Global Commercial Operations include medical education, sales training, marketing services and healthcare economics and serves all our franchises and regions.

Our regional organisations sell to our customers. In the US, our largest market, the commercial teams were organised by franchise and led by the franchise presidents. The President Orthopaedics, Sports Medicine & ENT and Americas also led our teams in LATAM and Canada. Our EMEA commercial organisation, headquartered in Zug, Switzerland, was led by the President EMEA Region. Our APAC commercial organisation, headquartered in Singapore, was led by the President APAC Region.

![img-2.jpeg](img-2.jpeg)

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# Franchise areas

# Three franchises set global product strategy

# Orthopaedics

Orthopaedics includes Hip and Knee Implants used to replace diseased, damaged or worn joints, robotics-assisted and digital enabling-technologies and services that empower surgeons, and Trauma & Extremities products used to stabilise severe fractures and correct hard tissue deformities.

W 25

# Sports Medicine & ENT

Our Sports Medicine & Ear, Nose and Throat (ENT) businesses offer advanced products and instruments used to repair or remove soft tissue.

W 42

# Advanced Wound Management

Our Advanced Wound Management portfolio provides a comprehensive set of products and services to meet broad and complex clinical needs of products and services to meet broad and complex clinical needs.

W 40

# Regions

# Three regional organisations sell to our customers

# US/Americas

In the US, our largest market, the commercial teams are organised by franchise and led by the franchise presidents. The President Orthopaedics, Sports Medicine & ENT and Americas also led our teams in LATAM and Canada.

# Europe, Middle East & Africa

Our EMEA commercial organisation is headquartered in Zug, Switzerland and led by the President of EMEA Region.

# Asia Pacific

Our APAC commercial organisation is headquartered in Singapore and led by the President of APAC Region.

# Putting customers at the heart of our business

Surgeons

Healthcare systems

Hospitals

Nurses

Payers

Patients

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Serving healthcare customers continued

## Our salesforce

**Our sales representatives support our customers through their technical knowledge.**

Depending on their area of specialism, representatives in our surgical businesses not only know the products that they sell and the surgical instruments used to implant them, but are also expected to have an understanding of the various surgical techniques a customer might use.

Once a sales representative is trained and certified, they typically spend the majority of their time working directly with and supporting customers in the safe and effective use of our advanced medical technologies, or identifying and contacting new customers.

In Advanced Wound Management, sales representatives develop their knowledge of how clinicians seek to prevent and treat wounds, as well as understand the economic benefits of using our products within treatment protocols.

We pride ourselves on giving customers a high standard of service and invest in developing our sales and marketing organisation. Our Global Commercial Training and Education team delivers a consistent content and curriculum-based approach, coupled with commercial training specialisation in key markets.

## Smith+Nephew Academy

**Smith+Nephew is committed to educating and training healthcare professionals on the safe and effective use of our products.**

Every year we provide tens of thousands of surgeons and nurses with opportunities to evaluate the latest evidence, and learn innovative surgical techniques and effective use of our products through our medical education programmes.

Central to Smith+Nephew's commitment to being a global leader in medical education and improving patient outcomes is providing a comprehensive accessible learning environment tailored to the needs of the healthcare professional.

Through the Smith+Nephew Academy, introduced in 2022, we are actively transforming the way we educate our customers around the world by surrounding them with leading-edge technology, clinical content and scientific data.

The multiple elements of the Smith+Nephew Academy offer a blended learning environment inclusive of state-of-the-art digital interactive learning, symposia, procedure-based education through hands-on experiences inclusive of Virtual Reality (VR) simulations, customised curriculum and programming specifically designed to meet the needs of the accomplished physician, resident, fellow and allied health professionals.

Smith+Nephew has three Academies in the US (Memphis, TN, Andover, MA and Pittsburgh, PA) as well as Academy London and Academy Singapore. Smith+Nephew Academy Munich is due to open in 2023. In addition we have smaller training facilities in Phoenix, AZ, Austin, TX and Minneapolis, MN.

**121,963**

Smith+Nephew medical education sessions attended by healthcare professionals in 2022, accessing in-person and virtual resources

![img-3.jpeg](img-3.jpeg)

Innovative medical education

![img-4.jpeg](img-4.jpeg)

![img-5.jpeg](img-5.jpeg)

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**In 2022, we opened the Smith+Nephew Academy Singapore, a major medical education and digital innovation centre covering the Asia-Pacific region.**

Supporting Smith+Nephew's purpose of Life Unlimited, the S+N Academy Singapore offers an engaging, immersive and interactive training environment for healthcare professionals to experience the latest products and technologies, and refine their techniques under the guidance of expert peers.

S+N Academy Singapore includes a state-of-the-art digital operating suite, including handheld robotics and a virtual reality simulation studio, as well as fully equipped surgical superstations for hands-on procedural training.

![img-6.jpeg](img-6.jpeg)

![img-7.jpeg](img-7.jpeg)

![img-8.jpeg](img-8.jpeg)

Smith+Nephew Academy Singapore was opened by our CEO Deepak Nath on 9 November 2022.

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Serving healthcare customers continued

# Orthopaedics

## A leading portfolio of Hip and Knee Implants, robotics and digital enabling technologies and Trauma products

**Smith+Nephew's Orthopaedic franchise vision is to improve mobility and outcomes, with unique and differentiated technologies that allow patients to live a Life Unlimited. Our innovative implants seek to mimic natural movement, are manufactured using materials with a track record of longevity and performance, and are accompanied by our enabling robotic technologies. We are well positioned as the supplier of choice for surgeons across the globe.**

Smith+Nephew's Orthopaedics franchise includes an innovative range of hip and knee implants used to replace diseased, damaged or worn joints, robotics-assisted enabling technologies that improve accuracy and facilitate precision during the surgical procedure, and trauma products used to stabilise fractures and correct bone deformities.

In Orthopaedic Joint Reconstruction, we have a broad, clinically proven and what we believe to be a differentiated portfolio that allows us to compete effectively across a market worth around $14.7 billion annually. This portfolio includes our proprietary OXINIUM® material which we consider offers a clear advantage over competitors (see page 31).

In addition, we believe our CORI® Surgical System is strongly positioned to take advantage of the trends towards robotic-assisted surgery and outpatient joint replacement seen across the segment. We are already a leader in-industry with CORI being the first robotic-assisted surgery system indicated for revision knee procedures in the US.

The Trauma & Extremities market is worth over $12.7 billion annually, and we are well positioned to compete effectively in this segment. The simplicity and efficiency of our EVOS® Plating System gives us an advantage in the largest segment in Trauma, and our TRIGEN® INTERTAN® Intertrochanteric Nail is backed by the clinical and economic data to position it as the standard of care for hip fracture,1,2 the second largest segment. In Extremities, following a portfolio acquisition in 2021, we are excited by our next generation shoulder implant, the AETOS® Shoulder System, due to launch in 2023, and expanding our presence in Foot & Ankle.

### Highlights

#### Orthopaedics revenue

**$2,113m**

2021: $2,156m

| Reported | Underlying a |
| --- | --- |
| -2.0% | +1.9% |

#### Orthopaedics trading profit

**$383m**

2021: $367m

|  | 2022 Revenue | 2022 Reported growth | 2022 Underlying growth a |
| --- | --- | --- | --- |
| Knee Implants | $899m | +2.5% | +6.8% |
| Hip Implants | $584m | -4.4% | -0.2% |
| Other Reconstruction | $87m | -5.6% | -1.8% |
| Trauma & Extremities | $543m | -5.7% | -2.6% |

a These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

![img-9.jpeg](img-9.jpeg)

OR30® Dual Mobility with OXINIUM DH Technology.

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## 2022 performance

Orthopaedics revenue declined -2.0% on a reported basis in 2022, including a 390bps headwind from foreign exchange. Revenue was up 1.9% on an underlying basis. The performance reflects the implementation of the previously disclosed hip and knee volume-based procurement (VBP) programme in China.

Within this, our Knee Implant segment performed strongly, offsetting declines in our other segments. Other Reconstruction was held back by global shortages of semiconductors. Franchise trading profit was up 4%, although the Orthopaedics trading profit margin of 18.1% remained below that of our other franchises.

## Strategy

Our Orthopaedic business has an innovative portfolio that allows us to compete in joint reconstruction, robotically enabled procedures, and Trauma & Extremities markets. We are building on our strong foundation to build momentum and unlock opportunity. Our areas of focus include optimised supply planning and delivery as well as improved asset deployment.

![img-0.jpeg](img-0.jpeg)

### CONCELOC® technology allows for bony ingrowth

Smith+Nephew's CONCELOC Advanced Porous Titanium is a patented, proprietary, 3D printed porous structure technology used in Smith+Nephew's leading REDAPT® Revision Hip System and new LEGION® CONCELOC Cementless Total Knee System (TKS).

CONCELOC is created in a virtual environment and manufactured through 3D printing additive manufacturing to optimise its porous structure to allow for bony ingrowth.1-5

Our initiatives are designed to drive growth across the Orthopaedic franchise. In Joint Reconstruction and Robotics we aim to accelerate growth by focusing on robotically enabled procedures in total knee and hip arthroplasty with the CORI Surgical System. Additionally, we will continue to leverage the unique material properties in OXINIUM across the knee and hip platform. For Trauma & Extremities, Smith+Nephew expects to globally scale the EVOS Plating System portfolio to compete more broadly in Trauma centres. In addition, the launch of our AETOS Total Shoulder System is expected to expand our footprint in the Shoulder Replacement market.

## Global market share

In our Orthopaedics franchise we are one of four leading players, competing against US-based companies Stryker, Zimmer Biomet and DePuy Synthes.

![img-1.jpeg](img-1.jpeg)

### OXINIUM Tour of Change

During 2022, the Tour of Change mobile exhibit visited leading Orthopaedic centres across the US, providing healthcare professionals with an opportunity to learn how OXINIUM Technology is a truly differentiated implant material, how an implant is made, and how it has been applied clinically during the last 20 years in over two million cases, delivering proven clinical performance in hip and knee replacements.

OXINIUM Technology has established itself as the best performing bearing with the lowest risk of revision in total hip arthroplasty (THA) at 9-18 years,7-10 alongside strong clinical performance in knees.10

## Global market size 2022b

### Hip and Knee Implants

$14.7bn +4%

2021: $14.1bn +11%

| A | Smith+Nephew | 10% |
| --- | --- | --- |
| B | Zimmer Biomet | 32% |
| C | Stryker | 23% |
| D | DePuy Synthesc | 20% |
| E | Others | 15% |

![img-2.jpeg](img-2.jpeg)

### Trauma & Extremities

$12.7bn +3%

2021: $12.2bn +10%

| A | Smith+Nephew | 4% |
| --- | --- | --- |
| B | DePuy Synthesc | 26% |
| C | Stryker | 22% |
| D | Zimmer Biomet | 11% |
| E | Others | 37% |

![img-3.jpeg](img-3.jpeg)

b Data used in 2021 and 2022 estimates generated by Smith+Nephew is based on publicly available sources and internal analysis and represents an indication of market shares and sizes.
c A division of Johnson & Johnson.

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Serving healthcare customers continued

Orthopaedics continued

Our technology takes the limits off living:

# Building strength with the R3$^{◊}$ Hip System

Getting a weightlifter back to competing.

In 2016, I was winning medals in national powerlifting competitions. By 2018, I was walking with a cane.

My many years in sports had finally caught up with me - the wrestling, marathon running, martial arts, and weightlifting. I was 63 years old with a degenerative left hip and so much pain that I couldn't take my dog for a walk.

I had spent much of my life guiding and motivating others, both as a physical trainer and a counsellor of at-risk youth, but it was my turn to seek help. I went to Dr Trey Remaley at AdventHealth Wesley Chapel. He recommended full replacement with the R3 Hip System with OXINIUM$^{®}$.

Flash forward to 2022: I'm back doing what I love and competing in powerlifting. I won first place in the Florida Senior Games for my age and weight division, and I'm able to help other people who need training and support.

I like to think of each day as an experiment. What else can I do? How much stronger can I get?

![img-4.jpeg](img-4.jpeg)

Patient: Mike

![Creative Commons BY license logo]() For patient testimonial reference

![img-5.jpeg](img-5.jpeg)

R3 is the primary cup used by Smith+Nephew surgeons globally.

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R3 Acetabular Cup provides a porous coating designed to enhance fixation and bony in-growth.$^{4,5,11,12}$

![img-6.jpeg](img-6.jpeg)

## R3 Hip System with OXINIUM

![img-7.jpeg](img-7.jpeg)

### Delivering innovation

OXINIUM Technology is a strong, resilient and advanced implant material that is only found in Smith+Nephew's portfolio of joint replacement systems.

OXINIUM Oxidised Zirconium has been used clinically for over 20 years as part of over two million procedures. On a global scale, OXINIUM Technology demonstrates excellent survivorship across a range of patients in hip and knee replacement surgery.

![img-8.jpeg](img-8.jpeg)

POLAR3$^{®}$ System is a total hip solution, meaning that it includes a hip stem, a hip head and an acetabular cup. Together, these three components are designed to replace the ball and socket structure of a natural hip.

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## Serving healthcare customers continued

### Orthopaedics continued

#### Key products by segment

##### Knee Implants

In Knee Implants, Smith+Nephew's specialised systems include leading products for total primary replacement and revision, as well as partial and patellofemoral joint resurfacing procedures, offering surgeons and patients the benefits of many proprietary technologies.

These include a unique kinematic knee, the JOURNEY® II Total Knee Arthroplasty system, which has been shown to replicate normal knee positions, shapes and motions,13-15 and utilises OXINIUM®, and a new LEGION® CONCELOC® Cementless Total Knee System (TKS), the first release in a multi-year roll-out of our family of cementless knee implant products.

In 2022, we brought these technologies together in the JOURNEY II ROX® Total Knee Solution, a new procedural product solution which aims to provide surgeons with the normal kinematics13-19 of JOURNEY II TKA, the cementless technology of CONCELOC Advanced Porous Titanium and the wear resistance20,21 of OXINIUM Technology.

We also offer strong differentiation in partial knees. In January 2022, we acquired the ENGAGE® Cementless Partial Knee System, the only cementless partial knee system commercially available in the US. With this acquisition, we are the only company offering total and partial cemented and cementless knees in the US, our largest market. The partial knee market is expected to grow faster than the total knee market and we expect cementless partial knees to grow ahead of overall partial knees, in line with recent patterns seen in the total knee segment.

##### First to market

In September 2022, we were proud to announce the first cases for revision knee replacement utilising our CORI Surgical System. We are the first orthopaedics company to receive US Food and Drug Administration (FDA) 510(k) clearance for a revision indication using a robotics-assisted platform.

RI.KNEE ROBOTICS utilises image-free smart mapping, eliminating the need for pre-operative CT/MRI scans and the potential for image distortion due to in situ components from the primary procedure.

##### Hip Implants

The Hip Implants portfolio is headlined by the POLAR3® Total Hip Solution, that has among the lowest revision rates.22-26 Our OR3O® Dual Mobility is the first system to use the latest OXINIUM DH advanced bearing technology. Dual mobility hip implants are used in primary as well as revision procedures. In addition, we offer a full breadth of stems to address global philosophies including the ANTHOLOGY® Hip System. For revisions, the REDAPT® Revision Hip System features CONCELOC Technology. Bridging primary and revision hips is the OR3O Dual Mobility with OXINIUM DH Liner Technology.

##### Other Reconstruction

Our Other Reconstruction business includes the CORI® Surgical System, one of the most advanced and efficient*27 solutions on the market. The CORI system is a smaller*28, portable solution capable of performing robotic-assisted knee and computer-guided hip surgery on a single platform. In robotic-assisted knee procedures, CORI utilises handheld precision milling which allows surgeons to execute TKA and UKA procedures with reproducible accuracy*29-30. Unlike other systems, the proprietary smart mapping feature creates a 3-D image of the patient's anatomy in surgery, eliminating time, costs, and radiation exposure*31 associated with preoperative CT scans.

RI.HIP NAVIGATION further expands indications on the CORI System, bringing a computer-guided total hip application to a platform previously dedicated to robotic-assisted knee procedures. When combined with Smith+Nephew hip implants, like the POLAR3® Total Hip Solution and OR3O Dual Mobility System, and complementary tools to assess spinopelvic mobility (RI.HIP MODELER) and digital templating (TraumaCadTM), RI.HIP on CORI delivers a comprehensive solution for navigated total hip arthroplasty. RI.HIP NAVIGATION and RI.HIP MODELER are designed to help maximise accuracy and reproducibility by delivering patient-specific component alignment.

During 2022, we successfully expanded the capabilities of the CORI Surgical System. With the addition of a first-in-market indication in the US for robotic-assisted revision knee using LEGION® Revision Knee System, the CORI System is currently the only solution indicated for robotic-enabled knee procedures across the full continuum of care - partial, total, and revision knee arthroplasty. Furthermore, new indications for LEGION CONCELOC Cementless Total Knee System and RI.HIP NAVIGATION were added to CORI. In addition, RI.INSIGHTS, a data management solution, provides surgeon access to on-demand case information with patient-reported outcome measures (PROMs) for hip and knee procedures completed with the CORI Surgical System.

![img-9.jpeg](img-9.jpeg)

32

254-259 For a full list of references

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## Trauma & Extremities

Smith+Nephew's portfolio includes differentiated technology across the major categories of Plates and Screws, Intramedullary Nails, Hip Fracture, Limb Restoration, Extremities, and Shoulder Replacement.

Leading products include the new EVOS® Plating System which includes a wide range of clinical indications from mini and small to large fragment and periprosthetic. Designed to offer surgeons an all-inclusive, expansive plating portfolio, EVOS provides the simplicity of logically organised instrumentation with advanced implant solutions that meets the demands and expectations of trauma surgeons.

The portfolio also includes the TRIGEN® INTERTAN® Hip Fracture System, which is backed by many years of strong clinical evidence.$^{1,2}$ For Extremities, the launch of SMART TSF® expanded the capabilities of the TAYLOR SPATIAL FRAME® External Fixator.

In January 2021, we completed the acquisition of an exciting Extremity Orthopaedics portfolio which has strengthened our business by adding a focused sales channel, complementary shoulder replacement and upper and lower extremities portfolio, and an exciting new product pipeline.

![img-10.jpeg](img-10.jpeg)

## Smart trauma technology

The SMART TSF is used in the management of fractures and correction of long bone deformities, including for fracture reduction and limb correction, lengthening and/or straightening. It is a circular, metal frame with two rings that connect with six telescopic struts that can be independently lengthened or shortened relative to the rest of the frame. This allows for six different axes of movement, which gives the TAYLOR SPATIAL FRAME the ability to correct even the most difficult congenital deformities and trauma cases. The SMART TSF application generates a prescription of strut adjustments which the patient can perform at a rate and rhythm determined by their surgeon, potentially reducing the need for travel and face-to-face consultation.

Smith+Nephew Annual Report 2022

![img-11.jpeg](img-11.jpeg)

## Bringing innovation into the NHS

In July 2022, we announced a pilot with a third party, Rods&Cones, to provide smart surgery glasses and digital remote assistance to customers. This enables Smith+Nephew representatives to 'see' through the eyes of the surgeon, instrumentalist nurse, or any healthcare professional using them, enabling continuous remote support before, during, and after surgical interventions.

Initially used in the UK to support the NHS and other customers, this solution allows Smith+Nephew to increase its ability to offer technical support for safe and effective use of its products at the right time from anywhere in the world. The increased complexity of surgery, advancement of technologies, and need for productivity and efficiency is enabled by ensuring a specialist is available remotely to support healthcare professionals upon request in a way which is not disruptive to the procedure.

![img-12.jpeg](img-12.jpeg)

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Serving healthcare customers continued

# Sports Medicine & ENT

## Elevating the Standard of Care

**Smith+Nephew's Sports Medicine & ENT franchise vision is to lead with innovative procedural solutions and elevate the standard of care in Sports Medicine & ENT. With a comprehensive procedural offering and differentiated technologies, we help healthcare professionals get their patients back to a Life Unlimited.**

Smith+Nephew's Sports Medicine & ENT franchise operates in growing markets where unmet clinical needs provide opportunities for procedural and technological innovation.

Smith+Nephew is a global leader in Sports Medicine, a $5.5 billion$^{b}$ market annually. Sports Medicine spans a broad patient population, including athletes. People of all ages are more active than ever before, and whenever they seek treatment for an injury or a degenerative condition, they expect a fast recovery and rapid return to activity. The surgeons who serve these patients want to treat them as efficiently and as minimally invasively as possible while ensuring the best possible outcomes. We have a rich history of product development, and our technologies, instruments and implants enable surgeons to perform minimally invasive surgery of the joints, including the repair of soft tissue injuries and degenerative conditions of the shoulder, knee, hip and small joints.

Ear Nose and Throat (ENT) is also an attractive, growing market segment offering the opportunity to address unmet needs with differentiated procedural solutions. The positive momentum is driven by emerging therapies, changes in the point of care, mainly to the office setting, and increasing global access for ENT procedures. We offer a portfolio of technologies focused on the unmet needs of some of the most common procedures general and paediatric ENT surgeons perform today. These include tonsillectomies, epistaxis (severe nose bleeds) and tympanostomies (insertion of ear tubes).

### 2022 performance

Sports Medicine & ENT delivered revenue growth on a reported basis of 1.9% including a 480bps headwind from foreign exchange. Underlying growth$^{a}$ was 6.7%.

Within this, all segments contributed positive growth. Sports Medicine Joint Repair performed strongly, in line with previous years, reflecting the strength of our portfolio. Arthroscopic Enabling Technology performance was held back by global shortages of semiconductors. ENT grew strongly as procedure volumes recovered from the impact of Covid. Franchise trading profit was up 3% with a trading profit margin of 29.7%.

### Highlights

#### Sports Medicine & ENT revenue

**$1,590m**

2021: $1,560m

| Reported | Underlying a |
| --- | --- |
| +1.9% | +6.7% |

#### Sports Medicine & ENT trading profit

**$472m**

2021: $459m

|  | 2022 Revenue | 2022 Reported growth | 2022 Underlying growth a |
| --- | --- | --- | --- |
| SMJR | $870m | +3.6% | +8.7% |
| AET | $567m | -3.8% | +0.9% |
| ENT | $153m | +17.1% | +20.4% |

$^{a}$ These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

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## Strategy

We have a strong Sports Medicine & ENT business and are well positioned for long-term leadership and delivering our vision of advancing standards of care. Our franchise is driven by the three strategic priorities - innovation, market development and commercial execution.

Smith+Nephew's Sports Medicine & ENT business is founded on procedural innovation, with differentiated technologies that shape clinical outcomes across the globe. Our portfolio continues to demonstrate strong growth across key segments, and we have an innovative pipeline in development.

In line with our vision, our emphasis on market development will help shift standards of care to technologies and procedures that deliver on the promise of Life Unlimited. We are committed to investments in key areas such as clinical evidence, medical education, and surgeon training for continued market development around key procedures. Our commercial initiatives reflect balanced selling across segments and regions, aligned priorities, and a customer-centric, winning mentality.

## Global market share

In Sports Medicine, Smith+Nephew holds a leading position behind Arthrex (US), and also competes against Stryker and DePuy Mitek.

## Global market size 2022b

### Sports Medicinec

$5.5bn +4%

2021: $5.3bn +13%

| A | Smith+Nephew | 27% |
| --- | --- | --- |
| B | Arthrex | 32% |
| C | Stryker | 11% |
| D | DePuy Mitekd | 10% |
| E | Others | 20% |

![img-13.jpeg](img-13.jpeg)

b Data used in 2021 and 2022 estimates generated by Smith+Nephew is based on publicly available sources and internal analysis and represents an indication of market shares and sizes.
c Representing repair products and arthroscopic enabling technologies, and excluding ENT.
d A division of Johnson & Johnson.

![img-14.jpeg](img-14.jpeg)

## Arthroscopy Solutions for the OR

We are driven to design products that enable better outcomes and improved quality of care.

We work with customers to ensure their arthroscopy suite is complete, robust and ready to perform. Whether they need a comprehensive visualisation system, or our COBLATION® Technology.

Our INTELLIO® Connected Tower Solution provides sports medicine surgeons with a complete suite of enabling technologies in the operating room (OR). It uses a centralised app to wirelessly connect and control the major components of an arthroscopy surgical tower from outside the sterile field, helping to streamline procedure support.

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Serving healthcare customers continued  
Sports Medicine & ENT continued

Our technology takes the limits off living:

# Supporting new tendon growth with REGENETEN

Back on the green and back in the swing.

I didn't see how a 'patch' was going to fix my shoulder, let alone get me out on the golf course again. But after several years of dealing with chronic pain in my right shoulder, I figured it was worth a shot. I had always been active - from my early years in professional hockey to my later years in golf - and I wasn't ready to give up competing.

The REGENETEN Implant was recommended by my surgeon and friend, Dr. Scott Sigman at Orthopaedic Surgical Associates. He said the 'patch' was really an implant for the damaged part of my shoulder, and that it could help with the partial tear in my rotator cuff.

That was in 2018. Since then, my shoulder has healed to 100%, and I don't have to think about pain anymore. I can sleep better at night, enjoy my work during the day, and I've been out playing golf tournaments from Florida to Maine.

I tell my old friend Dr. Sigman that I'll never have to see him again - except for a round of golf, of course.

![img-15.jpeg](img-15.jpeg)

Patient: Colin

![Icon of a person with a heart inside]() For patient testimonial reference

![img-16.jpeg](img-16.jpeg)

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# REGENETEN
Bioinductive Implant

-86%

Delivered an 86%
reduction in rotator
cuff re-tear rates
at 12 months.1-15,30

Rotator cuff
disease is a significant
and costly problem.

![img-17.jpeg](img-17.jpeg)

The REGENETEN Implant
stimulates the body's natural
healing response to support
new tendon growth.1,15

![img-18.jpeg](img-18.jpeg)

# Delivering
innovation

# Revolutionising
rotator cuff repair

Rotator cuff disease is a significant
and costly problem that causes
ongoing pain and limits patients'
mobility. Progressive in nature,
small tears tend to grow in size
and severity over time, eventually
requiring surgery.

The REGENETEN Implant supports
the body's natural healing response
to promote the growth of tendon-
like tissue and change the course of
tear progression.1,15,16,28,29 Derived
from highly purified bovine Achilles
tendon, it creates an environment
that is conducive to healing.1,15

In 2022, the results of a new
randomised controlled trial showed
that the addition of Smith+Nephew's
REGENETEN Implant delivered a
significant reduction in rotator cuff
re-tear rates at 12 months.30

![img-19.jpeg](img-19.jpeg)

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## Serving healthcare customers continued

### Sports Medicine & ENT continued

#### Key products by segment

##### Sports Medicine Joint Repair

Our Sports Medicine Joint Repair business offers innovative procedural solutions for repairing soft tissue injuries.

For shoulder repair, we develop products for Rotator Cuff Repair (RCR) and instability repair to help address pain and restore function.

Advanced Healing Solutions for RCR include the innovative REGENETEN® Implant. With at least 12 published clinical studies including 709 patients,1-12 the REGENETEN Implant has been shown to change the course of tear progression in early studies,1,13-16 aid return to normal activity13 and reduce re-tears versus conventional surgery.17,18 The HEALICOIL® Platform of Shoulder Anchors features an open architecture design to facilitate healing19 and is available in our REGENESORB® material which is designed to be absorbed and replaced by bone within 24 months.20-22

In knee repair, arthroscopic repair techniques have become more prevalent and widely recognised for the treatment of meniscal tears in recent years.23 Our All Tears, All Repairs Meniscal Repair Portfolio provides surgeons with unsurpassed options and possibilities for meniscal repair, including the FAST-FIX® FLEX Meniscal Repair System, launched in 2021, which enables all-zone all-inside meniscal repair to treat tears previously not accessible.24-26

Our portfolio also contains the NOVOSTITCH® PRO Meniscal Repair System, which addresses complex meniscal tear patterns, including horizontal cleavage tears affecting approximately one-third of meniscal repair patients.27 We also offer a comprehensive ligament portfolio of high-quality products and thoughtful techniques to address the full spectrum of ligament pathologies and concomitant injuries. Building upon our trusted legacy of data-driven solutions, we continue to innovate in this space.

Our hip preservation portfolio contains a comprehensive offering of technologies and techniques, establishing Smith+Nephew as a leader and innovator in the hip repair segment. The recently launched CAP-FIX® Capsular Management Family addresses all capsular management needs, from open to close. We are committed to Redefining Healing Potential in gluteus medius repairs, with the use of the REGENETEN Implant.**

##### Arthroscopic Enabling Technologies (AET)

In Arthroscopic Enabling Technologies, our products facilitate arthroscopic surgical procedures. The INTELLIO® Connected Tower Solution unites high-definition imaging solutions, energy-based and mechanical resection platforms, fluid management and access technologies.

The LENS® 4K Surgical imaging system uses 4K UHD image quality and network connectivity in a 3-in-1 console for multi-speciality environments.

Our WEREWOLF® Controller enables surgeons to remove soft tissue precisely,***31 in a variety of arthroscopic procedures. With COBLATION treatment, patients experienced significantly less bleeding post-operatively.***32

The WEREWOLF FASTSEAL 6.0 Hemostasis Wand, launched in 2021, is used in orthopaedic procedures for hemostasis of soft and hard tissues bringing a technology widely used in sports medicine to orthopaedic customers.

##### Ambulatory Surgery Centers (ASCs)

At Smith+Nephew, we go beyond product to deliver a comprehensive offering for ASCs. There continues to be a shift of both sports medicine and orthopaedic procedures from Hospital to ASC outpatient settings. We are uniquely positioned to meet the needs of the market with procedural solutions spanning across sports medicine, hip and knee reconstruction, robotics, trauma, extremities, and post-surgical wound care. Smith+Nephew offers a custom approach to the ASC, where we leverage not only our best-in-class products, but also introduce power up their ASC. As the ASC market evolves, Smith+Nephew will continue to meet the unique needs of this segment with procedure innovation and tailored programmes for growth.

![img-20.jpeg](img-20.jpeg)

FAST-FIX FLEX
Meniscal Repair
System

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## Ear, Nose and Throat (ENT)

In *Ear, Nose and Throat*, our COBLATION Plasma Technology, which has been used to remove tonsils and adenoids for over 15 years,$^{34,35}$ has an ability to remove tissue at low temperatures with minimal damage to surrounding tissue.$^{36-41}$

Evidence shows that COBLATION® Intracapsular Tonsillectomy (CIT) procedures offer less pain, quicker recovery and a decreased risk of post-operative bleeding with similar outcomes to total tonsillectomies.$^{35-41}$ Smith+Nephew offers a full portfolio of COBLATION Wands for CIT procedures.

Our Tula System provides an in-office solution for placement of tympanostomy tubes.

In addition, we market a range of dissolvable and removable post-operative nasal dressings, as well as a comprehensive portfolio of epistaxis (nosebleed) solutions.

![img-0.jpeg](img-0.jpeg)

Hemostasis Wand

![img-1.jpeg](img-1.jpeg)

## Delivering Innovation with Tula®

Smith+Nephew’s Tula System gives ENT surgeons an option to place ear tubes in an awake child during an office visit without the need for general anaesthetic. The physician numbs the eardrum using a novel, child-friendly anaesthetic while the patient may sit up, play, and remain with their parent. A specialised tube delivery system allows the physician to place an ear tube in less than half a second, minimising the amount of time the child needs to remain still. Most children return to normal activities immediately following the Tula procedure.$^{42}$

![img-2.jpeg](img-2.jpeg)

![img-3.jpeg](img-3.jpeg)

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Serving healthcare customers continued

# Advanced Wound Management

## Shaping What's Possible in Wound Care

**Smith+Nephew's Advanced Wound Management franchise vision is to Shape What's Possible in Wound Care. Through our extensive portfolio, designed to meet broad and complex clinical needs, we help healthcare professionals solve the challenges of preventing and healing wounds.**

The global wound care market is worth around $10.7 billion$^{b}$ globally per annum. Long-term growth has been driven by the needs of an aging population in many markets and as we experience lifestyle-related health conditions, such as increasing prevalence of obesity, diabetes and vascular disease. These conditions are key drivers of wound prevalence which contribute to the pressure on healthcare spending.

In Advanced Wound Management, we seek to help healthcare systems through innovation in products and services, to deliver accelerated healing or preventing wounds, and to do more with less, such as enabling patients to be treated faster requiring fewer resources, or moved from acute to homecare settings. We do this across our three segments of Advanced Wound Care (AWC), Advanced Wound Bioactives (AWB) and Advanced Wound Devices (AWD).

### 2022 performance

Advanced Wound Management delivered revenue growth on a reported basis of 1.1% including a 530bps headwind from foreign exchange. Underlying growth$^{a}$ was 6.4%.

Within this, all segments contributed positive growth. Advanced Wound Care's performance reflected the breadth of our portfolio, Advanced Wound Bioactives delivered sustained good growth from our skin substitutes portfolio, and the strong growth from Advanced Wound Devices was driven by our PICO$^{®}$ Single Use Negative Pressure Wound Therapy System. Franchise trading profit was down 8% with a trading profit margin of 28.8%.

### Strategy

Our vision of Shaping What's Possible in Wound Care is delivered through the two strategic levers of portfolio enhancement and ever improving commercial execution. Portfolio enhancement includes new product development, line extensions and acquisitions. To drive ever improving commercial execution

### Highlights

#### Advanced Wound Management revenue

**$1,512m**

2021: $1,496m

| Reported | Underlying a |
| --- | --- |
| +1.1% | +6.4% |

#### Advanced Wound Management trading profit

**$436m**

2021: $474m

|  | 2022 Revenue | 2022 Reported growth | 2022 Underlying growth a |
| --- | --- | --- | --- |
| AWC | $712m | -2.6% | +5.2% |
| AWB | $520m | +4.9% | +5.4% |
| AWD | $280m | +4.3% | +11.6% |

$^{a}$ These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measure prepared in accordance with IFRS on pages 236-240.

GRAFIX$^{®}$ Placental Membranes form our skin substitute product range.

![img-4.jpeg](img-4.jpeg)

DURAMAX S Silicone Superabsorbent Dressing for highly exuding wounds launched in 2022.

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we seek to inspire, engage and align
on our global strategy across all regions
and functions as efficiently as possible.
Through these strategic priorities we
are driving performance and supporting
delivery of Smith+Nephew's global
strategy to Strengthen, Accelerate and
Transform through the 12-point plan.

![img-5.jpeg](img-5.jpeg)

# The future of pressure injury prevention

Hospital-acquired pressure injuries (HAPIs)
are on the rise.

Despite a decrease in other hospital-acquired
conditions, HAPIs are up 6%.30 Each year,
complications from pressure injuries result
in an estimated 60,000 deaths in the US.
The average incremental cost of treating
a pressure injury is $21,767.

Smith+Nephew's LEAF® Patient Monitoring
System promotes adherence to patient
turning procedures.41,42

Visual alerts in the patient room and at the
nurses' station make it easy for the whole
team to see who needs to be turned and
when43. Plus, the LEAF System's Integrated
Positioning Technology is the first tool that

# Global market share

We operate in all three categories in
wound care, and have the second largest
business globally in terms of revenue.
In the Advanced Wound Care segment
we compete in dressings with Mölnlycke
(Sweden), Coloplast (Denmark) and
ConvaTec (UK). In Advanced Wound
Devices, we are the primary challenger
to Negative Pressure Wound Therapy
incumbent 3M. In our Advanced
Wound Bioactives franchise, we have
leadership positions in a number of
our respective categories.

# Global market size 2022b

# Advanced Wound Management

$10.7bn +4%

2021: $10.3bn +11%

| A Smith+Nephew | 14% |
| --- | --- |
| B 3M | 17% |
| C Mölnlycke | 10% |
| D ConvaTec | 6% |
| E Others | 53% |

![img-6.jpeg](img-6.jpeg)

b Data used in 2021 and 2022 estimates generated by
Smith+Nephew is based on publicly available sources
and internal analysis and represents an indication
of market shares and sizes.

![img-7.jpeg](img-7.jpeg)

RENASYS® NPWT
System offers options
for the hospital and
home setting.

measures the quality and effectiveness
of patient turning, including patient turn
frequency and turn angle.

Alongside our ALLEVYN® LIFE Dressings,
which are multi-layered and uniquely
constructed for protecting intact skin
against pressure injury onset as part of a
pressure injury/ulcer prevention protocol44-46
and the SECURA® range of skin care products,
- Smith+Nephew offers a powerful portfolio
to help facilities follow evidence-based
protocols, and develop improved practices
to prevent HAPIs.51

a Between 2014 and 2017 in the US.

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Serving healthcare customers continued
Advanced Wound Management continued

Our technology takes the limits off living:

# A new lease of ALLEVYN LIFE

Rediscovering many of the small things we take for granted.

ALLEVYN LIFE Foam Dressings are designed to be left in-situ for up to five or seven days. 22,23,24*

When Allan, a once active sportsman, developed diabetes 15 years ago he soon found that his passions interests and many day-to-day tasks suddenly became out of reach. Although he recognised that diabetes was something he needed to manage, pain and discomfort permeated his everyday life to the point that even a leisurely stroll was impossible.

After several complications, with the possibility of foot amputation, it was finally suggested that Allan managed the wound using ALLEVYN LIFE Dressings and the effect on his life was transformational. Recounting the simplicity of using ALLEVYN LIFE Dressings (even administering them himself, as directed by his healthcare professional), he described how our unique foam dressing technology cushioned his wound and helped to alleviate his pain.

"Given me a new lease of life."

Now rediscovering many of the small things he took for granted - such as gardening, mowing the lawn, or even taking his son a cup of tea - Allan accredits much of his progress to our dressing technology. In a seemingly small treatment intervention, ALLEVYN LIFE Dressings made all the difference in the world to Allan; helping to put him back on a path to Life Unlimited.

![img-8.jpeg](img-8.jpeg)

Patient: Allan

For patient testimonial reference

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ALLEVYN LIFE dressings manage exudate with visible change indicators and are comfortable to wear.$^{25,26,27,28,29}$

![img-9.jpeg](img-9.jpeg)

## ALLEVYN LIFE Dressing

![img-10.jpeg](img-10.jpeg)

### Delivering innovation

#### Reducing the burden on nurses through shared-care

In June 2022, a new peer-reviewed article in Wounds International proposed that an estimated 3.5 billion hours of nursing time could be released globally by 2030 if shared-care approaches between nurses and patients are adopted in chronic wound care alongside long-wear advanced foam dressings.$^{18}$

Shared-care is the clinical practice of involving patients in the ongoing delivery of care, whilst supported and guided by a healthcare professional. Patients with chronic wounds may be encouraged to have greater involvement in dressing changes, lifestyle and nutrition factors, and monitoring and reporting. The success of shared-care is evidenced in other chronic conditions such as diabetes$^{19}$, stoma management$^{20}$ and incontinence.$^{21}$

ALLEVYN LIFE Foam Dressings complement a shared wound care approach by enabling nurses and patients to support healing. The dressings are designed to be left in-situ for up to 5 or 7 days,$^{22-24*}$ manage exudate with visible change indicators and are comfortable to wear.$^{25-29}$

* Up to 5 days for the sacral area.

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## Serving healthcare customers continued
Advanced Wound Management continued

### Key products by segment

#### Advanced Wound Care (AWC)

Smith+Nephew started as a wound care company and through our Advanced Wound Care business we have grown to be a leader in the segment. Today our portfolio includes products that are designed to manage exudate and infection, protect the skin and help prevent pressure injuries.

In exudate management, our products provide appropriate wound fluid handling and absorption to help promote an optimal wound healing environment.1-3 Our ALLEVYN® LIFE Foam Dressing is uniquely differentiated, with its EXUMASK® change indicator and hyper-absorbent lock away layer with EXULOCK® technology for odour control and fluid lock-in.2,4,5 The effectiveness of the ALLEVYN Dressing range has been demonstrated across 138 publications in 19 countries on over 12,000 patients and volunteers.6 In 2022, we introduced in Europe and the USA our DURAMAX® S Silicone Superabsorbent Dressing for highly exuding wounds. Superabsorbers are one of the fastest growing categories of dressings in Europe.

In infection management, our key silver-based ACTICOAT® Antimicrobial Barrier Dressings, DURAFIBER® Ag Absorbent Gelling Silver Fibrous Dressing, ALLEVYN Ag Antimicrobial Foam Dressing, as well as our range of IODOSORB® Cadexomer Iodine products provide clinicians with a range of solutions to address bacterial burden, biofilm and infection.7-17

#### Advanced Wound Bioactives (AWB)

Our Advanced Wound Bioactives portfolio provides a unique approach to debridement, dermal repair, and tissue substitutes with considerable evidence supporting their clinical application.

Collagenase SANTYL® Ointment (250 units/gram) is the only FDA-approved biologic enzymatic debridement agent available in the US market, and is indicated for dermal ulcers, severely burned areas and moderate to severe soft tissue burns. REGRANEX® gel is the only FDA-approved Platelet-Derived Growth Factor for the treatment of diabetic neuropathic ulcers, formulated to act as a first-line treatment following effective ulcer care.

In our skin substitute product range, GRAFIX® Placental Membranes and STRAVIX® Umbilical Tissues retain the extracellular matrix, growth factors and native placental components to support wound closure.30,31 They are intended for application directly to acute and chronic wounds and as a surgical cover or barrier. In addition, we offer OASIS®® Matrix and OASIS MICRO products, which are naturally derived scaffolds of extracellular matrix (ECM), composed of porcine small intestinal submucosa (SIS) and indicated for the management of a wide range of acute and chronic wounds, burns and surgical interventions.32

* OASIS is manufactured by Cook Biotech, Inc.

#### Advanced Wound Devices (AWD)

In Advanced Wound Devices, our portfolio helps improve healing outcomes in chronic wounds, reduces surgical site complications and facilitates preventative care for pressure injuries. Within the negative pressure wound therapy (NPWT) category, we offer single-use and traditional (cannister-based) solutions offering customers a one-stop-shop with great flexibility.

Our PICO® range of single-use negative pressure wound therapy systems with its proprietary AIRLOCK® Technology layer has demonstrated significant healing outcomes for chronic wounds35,4,34 and in the reduction of surgical site complications in closed incisions,35,34 in a highly portable form that allows patients to return to their lives.36,37 Our traditional RENASYS® NPWT System offers options for the hospital and home setting.

AWD also includes the LEAF Patient Monitoring System that supports a hospital's pressure injury prevention strategy, and the VERSAJET® Hydrosurgery System, a surgical debridement device.

* Compared to baseline trajectory, n=52 wounds; p=0.006.

† Compared to care with standard dressings; p=0.00001; meta-analysis of 29 studies (odds ratio (OR): 0.37).

![img-11.jpeg](img-11.jpeg)

#### PICO

PICO Single Use Negative Pressure Wound Therapy System (sNPWT) is cost effective and improved outcomes compared with standard care to help prevent surgical site complications in patients with surgically closed incisions. A systematic literature review and meta-analysis of 19 studies involving 4,530 patients showed a 63% reduction in the odds of developing surgical site infections with the prophylactic use of PICO sNPWT compared with standard care.35

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## Hospital-acquired pressure injuries (HAPIs) are on the rise$^{38}$

Despite a decrease in other hospital-acquired conditions, HAPIs are

**+6%$^{38*}$**

Each year, complications from pressure injuries result in an estimated

**60,000**

deaths in the US$^{39}$

The average incremental cost of treating a pressure injury is

**$21,767$^{40}$**

* Between 2014 and 2017 in the US.

![img-12.jpeg](img-12.jpeg)

## Delivering Innovation

Smith+Nephew's Advanced Wound Management franchise is also focused on utilising digital technology and data analytics to provide new forms of value to our customers. We aim to help optimise outcomes, prevent unnecessary wounds and complications, support patient care self-management where appropriate, drive transition to new efficient business models and establish data as a strategic asset.

In 2022, we launched the award-winning **WOUND COMPASS® Clinical Support App**, a comprehensive digital support tool for healthcare professionals that helps reduce practice variation.$^{52}$

This simple and easy-to-use app$^{52}$ is accompanied by additional educational resources, images, and diagrams and can be customised to local customer formulary.$^{52}$

![img-13.jpeg](img-13.jpeg)

![img-14.jpeg](img-14.jpeg)

![img-15.jpeg](img-15.jpeg)

For detailed product information, including the indications for use, contraindications, effects, precautions and warnings, please consult the product's instructions for Use (IFU) prior to use.

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# Manufacturing and quality

Smith+Nephew takes great pride in its manufacturing expertise and commitment to distributing innovative, quality products globally.

![img-16.jpeg](img-16.jpeg)

**Our Global Operations team supports the delivery of the Group's strategy by ensuring that we respond efficiently to demand, new product development and changing regulatory requirements.**

We operate manufacturing facilities in countries across the globe, and have central distribution facilities in the US, Europe and Asia. Products for our Orthopaedics franchise are primarily manufactured at facilities in Memphis (US), Penang (Malaysia), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China) and Warwick (UK). Sports Medicine products are primarily manufactured at the Alajuela (Costa Rica) and Mansfield (US) facilities. Our major manufacturing sites for Advanced Wound Management products are Hull (UK), Fort Worth (US), Columbia, Maryland (US) and Suzhou (China).

During 2022 our global operations were subject to disruption from a number of factors including the impact of the war in Ukraine on the access and cost of supply channels, the widely reported global shortages of some raw materials and components, and localised factors including Covid-related lockdowns in China. During the year we worked to closely manage the impact of these factors on our business.

We procure raw materials, components, finished products and packaging materials from suppliers globally. These include metal forgings and castings, optical and electronic sub-components, active ingredients and semi-finished goods, as well as packaging materials. Our procurement team aims to contract to ensure value based on total spend across the Group. All our suppliers are subject to our Third Party Guide to Working with Smith+Nephew meaning they agree to conduct business on our behalf in an ethical manner that is compliant with all applicable laws, regulations and industry codes of conduct, and to manage their suppliers in accordance with the same standards.

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We work closely with our suppliers to ensure high quality, delivery performance and continuity of supply. During 2022 we saw the impact of significant inflation across our supply chain.

We outsource certain parts of our manufacturing processes where necessary to obtain specialised expertise or to lower cost without undue risk to our intellectual property or quality. We monitor suppliers through on-site assessments and performance audits to ensure the required levels of quality, service and delivery as well as compliance with our Third Party Guide to working with Smith+Nephew.

## Improving productivity

The 12-point plan (see pages 8-11) includes focus on improving productivity to support trading profit margin expansion. Areas of opportunity include driving lean methodologies across our manufacturing operations, further network optimisation and direct and indirect procurement savings.

We are reviewing lean methodologies across our operations to simplify processes, drive greater standardisation, and reduce scrap. We expect to roll out the lean programme in a phased approach, focusing initially on the greatest potential by product category and location, and with the oversight and accountability to make improvements sustainable. We will continue to review our network for further strategic opportunities.

We are also targeting procurement savings to help mitigate cost inflation. Opportunities include where spend is fragmented between large numbers of suppliers, or disproportionately using providers in high-cost countries.

## Quality and Regulatory Affairs

Our Quality and Regulatory Affairs function supports full product life-cycle management of Smith+Nephew's global product portfolio from design and development through manufacturing and post-market surveillance.

These teams establish appropriate processes and procedures to facilitate compliance with complex global regulations and laws that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products.

The Quality and Regulatory Affairs teams directly support expansion of our global portfolio through the registration of new products and existing products in new markets, as well as ensuring compliance with regulatory reporting standards.

The European Union Medical Device Regulation (EU MDR) is a significant regulatory change whereby medical devices carrying a CE mark now face greater scrutiny than ever before to ensure they are effective and safe. Our Regulatory Affairs is working with our Notified Bodies to certify our portfolio to EU MDR during the transition period which is currently scheduled to finish on 25 May 2024.

We are also monitoring the progress of the European Commission's proposal to amend the EU MDR transitional period including extending the transitional period.

## Building a world-class network

Aligned to our Strategy for Growth pillar to strengthen our foundation, we are undertaking major investment in our manufacturing network to enable Smith+Nephew to serve customers and their patients sustainably through advanced manufacturing.

In Malaysia we opened our new high technology manufacturing facility Penang in June 2022. The 277,000 square-foot facility will primarily support the Company's Orthopaedics business, which is expected to grow strongly in the Asia Pacific region.

In the UK we announced plans in June 2022 to build a new facility for our Advanced Wound Management franchise on the outskirts of Hull, UK. The design of the new facility takes into account sustainability factors and standards with a focus on energy and resource efficiency.

![img-17.jpeg](img-17.jpeg)

Smith+Nephew Annual Report 2022

# Strengthening our Culture through leadership

Our Culture of Care, Courage and Collaboration sets Smith+Nephew apart. Our leaders - current and future - set the tone for our culture and the example for our global team to follow. We believe developing our current and future people leaders is an investment that benefits the entire organisation. Engaged leaders create engaged employees and contribute to a high-performing and purpose-driven company.

At Smith+Nephew, we know that our people enable our business strategy. That's why our comprehensive people strategy is focused on making Smith+Nephew a workplace that talented people want to join and stay, creating positive and simple processes to support our employees in the 'moments that matter', from recruitment to retirement, and building a high performing and inclusive culture where everyone feels a sense of respect and belonging.

Our Culture of Care, Courage and Collaboration is central to all we do. In 2022, we advanced this culture through strengthening and embedding our Inclusion, Diversity and Equity (IDE) initiatives, expanding our wellbeing offerings, engaging employees in their role and connection to our business strategy and empowering and enabling our people leaders.

## An engaged team

For the fourth year, we conducted our annual Global Employee Survey administered by Gallup, a leader in survey research, using the Q12 survey tool. The Q12 tool measures the key aspects of employee engagement which creates an environment of trust and enables business performance.

![img-18.jpeg](img-18.jpeg)

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The Q12 survey tool focuses strongly on the role of the people leader in engaging their team. People leaders are provided with their individual survey scores and conduct team sessions where the results are discussed and actions agreed - both to improve on opportunity areas and to maintain strengths. These action plans continued throughout the year and are assessed at our annual Gallup Accountability Check-in Survey to determine whether employees are seeing improvements.

In 2022, we saw a strong response rate of 88% and an overall upward trend of our results compared with last year.

Our overall Company engagement score was 4.12, is a slight increase from last year (4.08), putting us in the 73rd percentile of Gallup's database. This gives us a good foundation on which to build.

The survey highlighted overall strengths in employee connection to our purpose and culture and the feeling that opinions count. Given some of the recent challenges around supply chain it was not surprising to see that our greatest areas of opportunity, where our scores fell slightly (down 0.02 points), are having the materials and equipment, as well as overall satisfaction with Smith+Nephew as a place to work.

## Introducing our Commitments

In 2022, using results from our Global Employee Survey as well as inputs from leaders and employees across the business, we defined the specific expectations and behaviours needed to deliver our strategy and support our culture. Our Commitments, which take effect from 2023, define the specific ways in which we expect our employees to demonstrate our culture every day. These Commitments were launched through a leader-led cascade so that our leaders truly owned them and made them relevant for their teams.

## Our Purpose

# Life Unlimited

## Our Culture

![img-0.jpeg](img-0.jpeg)

A culture of empathy and understanding for each other, our customers and patients.

![img-1.jpeg](img-1.jpeg)

A culture of continuous learning, innovation and accountability.

![img-2.jpeg](img-2.jpeg)

A culture based on mutual trust, respect and belonging.

## Our new Commitments

### Deliver for our customers

Understand our customer needs. Constantly deliver the products and services they need, when they need them, every time.

### Show empathy

Be authentic, respectful and transparent. Listen, seek to understand and adapt appropriately.

### Develop and grow

Foster your own development and that of your teams. Share honest feedback, coach, support and celebrate progress.

### Take initiative

Pursue possibilities and take appropriate risks. Speak up and respectfully challenge to improve our Company.

### Take accountability

Set priorities and associated KPIs. Take ownership for your decisions, actions and outcomes.

### Be adaptable

Learn from successes and failures. Be brave, challenge and be open to change. Try new things and celebrate our wins.

### Be inclusive

Value difference and foster diversity and open communication. Always encourage and respect alternative perspectives.

### Build trust

Act with integrity, honesty and consistency. Keep commitments and deliver on promises.

### Find solutions

Work together to address the root cause of issues. Have the difficult conversations and make decisions. Act in the best interest of our Company.

www.smith-nephew.com

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## Strengthening our Culture through leadership continued

### Inclusion, Diversity & Equity

We want Smith+Nephew to be recognised as a place where every individual feels they belong, are empowered, valued, and have access to opportunities to build great careers, thrive and achieve their fullest potential.

Our Employee Inclusion Groups (EIGs) cover a broad spectrum of diversity and provide a network for employees to engage and collaborate. Each group is sponsored by a member of our Executive Committee who takes an active role in the Group's development and serves as a champion for their respective focus area.

During 2022, we had 10 EIGs covering gender, race and ethnicity, veterans, mental health and physical wellbeing, generations, and LGBTQ+. We officially launched our tenth EIG, EMPOWER (centred around the differently abled/disabled area of diversity) in December 2022 to coincide with disability awareness month. EIGs currently reach over 3,000 employees, with more than 20 engagement activities per month.

Leaders also take an active role on our Life Councils, which are employee groups at a site or country level aimed at strengthening employee engagement in the workplace and through community activities.

We continue to actively engage externally to attract diverse talent. In 2022, we sponsored the Scientist Mentoring Diversity Program, the National Society of Black Engineers and the Society of Women in Engineering, for which we are also a key corporate sponsor. Our EIGs were involved as brand ambassadors in activities that promote recruitment of diverse talent.

In 2022, Smith+Nephew was recognised by Forbes as a 'Top Female Friendly Company' for a second year running.

### Gender ratios

Overall, we saw an increase of female representation in senior roles, up to 33% in 2022 from 31% in 2021. The percentage of female Board members was 36% in 2022, up from 33% in 2021.

#### Total employees1

19,012

Male

57%

Female

43%

![img-3.jpeg](img-3.jpeg)

#### Senior managers and above2

1,099

Male

67%

Female

33%

![img-4.jpeg](img-4.jpeg)

#### Board of Directors

11

Male

64%

Female

36%

![img-5.jpeg](img-5.jpeg)

1 Number of employees at 31 December 2022 including part-time employees and employees on leave of absence.

2 Senior managers and above include all employees classed as Directors, Senior Directors, Vice Presidents, Executive Officers and includes all statutory directors and Directors of our subsidiary companies at 31 December 2022.

![img-6.jpeg](img-6.jpeg)

### EMPOWER

EMPOWER is the voice within Smith+Nephew for all employees affected by or living with a visible or invisible disability, chronic health condition, neurodiversity, and/or mental health difficulties. Together we can improve the experience of our differently abled colleagues throughout support, advocacy and education.

### + SWE

Society of Women Engineers

### + UNITY

Race + Ethnicity

### + GAIN

Gender Alliance for Inclusion

### + WIN

Women's Inspired Network

### + GLOBAL SNYP

Engage, Develop, Grow, Excel

### + HERIZON

We care, we bond...

### + CARE

Mental Health + Physical Wellbeing

### + VETERANS+UNLIMITED

Veterans of Military Service and Active Reservists

### + PRIDE

LGBTQ + Community + Allies

### + EMPOWER

Support, Advocate, Educate

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## Wellness

Wellness - physical, mental and financial - plays a critical part in enabling employees to engage and focus on delivering their objectives.

With this in mind, and based on feedback from our Global Employee survey, in 2022 we reviewed several areas of our global rewards programme and implemented several initiatives to support employee wellbeing.

We expanded our global wellness programme to offer a wider range of resources in multiple languages through local Care EIG groups and content on our intranet SNLife. We held wellbeing webinars in local languages several times this year allowing the local teams to pick the topics of most relevance for their populations/countries.

We also improved our Employee Assistance plan to include an enhanced global emotional wellness solution to address mental health concerns. This will provide timely mental health appointments and a care navigator as well as financial, legal and work/life support such as finding day care or elder care for dependants.

Responding to the significant impact of high rates of inflation in a number of our markets on our employees, we made an exceptional off-cycle base pay adjustment for eligible employees in many markets, including the UK and US.

At Smith+Nephew we promote flexibility in where, how, and when we work. This means looking at the spaces in which we work, the ways we work and our work patterns. We believe our approach is an important differentiator, and helps our employees balance work and home life.

Our Global Flexibility Principles serve as the guiding philosophy for identifying flexible work solutions that foster productivity and wellbeing while supporting our culture. While the principles are consistent globally, specific flexibility options will vary depending upon the individual, role and site/country/region.

![img-7.jpeg](img-7.jpeg)

![img-8.jpeg](img-8.jpeg)

## Wellbeing award

In 2022, we were honoured to be one of only four organisations awarded a Gold level Cigna Healthy Workforce Designation for having created a healthy work culture through our employee wellbeing and engagement programme. Cigna is an American multinational managed healthcare and insurance company and Smith+Nephew's designated insurance provider for employees in the US.

![img-9.jpeg](img-9.jpeg)

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## Strengthening our Culture through leadership continued

### Leadership development

There has been a five-fold increase in the number of leadership programme participants in 2022 compared to the previous year, with almost 1,900 employees successfully completing programmes. These programmes range from Introductions to leadership for first-time leaders to aspiring Managing Director and Executive Development Programmes. We collaborate with other companies on strategic-level problem-solving development challenges, and offer courses from a range of business schools.

In 2022, we launched the People Leader Hub, which contains resources to support our key people practices, skills and behaviours and includes more than 400 learning and development resources. By year end the People Leader Hub had more than 20,000 views and 10,000 users.

In 2022, more than 2,000 leaders globally took training to reduce bias in the interview process. We aim to practise 'bias interruption', which involves diverse sourcing, diverse slates of candidates, and diverse interview panels.

We will continue to emphasise diverse talent across all management levels and we continue to see progress in female representation. We aim to strengthen our approach towards diversity by setting more goals to progress our racial and ethnic diversity in 2023-2024.

### Supporting learning and growth

To truly live our purpose of Life Unlimited, we must realise every employee's full potential. To achieve this, all our employees have robust 70-20-10 development plans, which take a blended approach to learning and development: 70% through experiential/on-the-job learning; 20% by learning from others, for example through coaching; and 10% from formal learning. Our performance management process aligns each individual's objectives with our strategy.

Smith+Nephew's compensation strategy supports high performance and accountability across both financial and cultural performance metrics. A robust compensation framework is vital in attracting, retaining and motivating high calibre people, driving better business results across an equitable work environment. We are Living Wage Accredited in the UK, voluntarily paying above the government required minimum. We also offer a share save plan to the majority of employees globally.

![img-10.jpeg](img-10.jpeg)

### Elevate

200 participants signed up for our Elevate programme to support female professional development in 2022 as we continue to build engagement and retention in our female talent pipeline. Also in 2022, we enhanced and streamlined our female sponsorship programme, which is now called our Diverse Sponsorship programme. We have 12 senior-level employees strategically aligned to each Executive Committee leader to foster leadership transfer of knowledge and professional development.

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## Achieving results with responsibility

Our Global Compliance Programme helps our business to comply with applicable laws, regulations and industry code requirements in the markets in which we operate. Our comprehensive programme includes policies, guidance, role-based training, monitoring and validation processes supported by data analytics and reporting channels. Our Compliance teams work closely with business partners to ensure that our programme evolves in parallel with business changes and emerging risks in the sector. Data Privacy is an integral part of our Programme and regulation in this area continues to increase. During 2022, we increased our focus on Data Privacy and have added resource and expertise to our team, notably in the US and APAC regions.

We are committed to helping our employees and third-party partners to do business in the right way through simplification of Compliance programme requirements and by embedding key Compliance controls into business processes. We regularly review our Global Policies and associated tools. Through our global intranet, we provide these and other resources to guide employees to make decisions that comply both with the law and our Code of Conduct.

Our business models require that we work closely with third-party distributors, agents and others, and in many countries these partners sell product on our behalf. We have a well-established risk-based Third Party Compliance Programme which includes ongoing due diligence, training and oversight of these partners.

We have a strong ethics, compliance and governance infrastructure with oversight from the Board Compliance & Culture Committee, to ensure managers, employees and third parties act with integrity. Data Privacy has now been fully integrated into the Compliance governance framework. We ensure appropriate oversight of significant interactions with healthcare professionals or government officials, and we comply with all national and state transparency reporting laws which require reporting of physician compensation.

All employees have a responsibility to report violations of our Code. This may be done via their manager, directly to Compliance, HR or Legal functions, or through an externally managed reporting channel where anonymous reports may be made.

## An ethical employer

At Smith+Nephew, 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.

Smith+Nephew gives individuals with disabilities fair consideration for all vacancies against the requirements of the role. Where possible, for any employee who has a disability or who becomes disabled while working for us, we make reasonable adjustments and provide appropriate training to ensure that they are supported in their career. We are committed to providing equal opportunities in recruitment, promotion and career development for all employees, including those with disabilities.

We do not use any form of forced, compulsory or child labour. Smith+Nephew supports the Universal Declaration of Human Rights of the United Nations, respecting the human rights, dignity and privacy of individuals and their right to freedom of association, freedom of expression and the right to be heard.

As a global medical technology business, we recognise our responsibility to take a robust approach to preventing slavery and human trafficking. Smith+Nephew is committed to preventing such activities in all of its corporate operations and in its supply chains.

Our full policy on modern slavery is available on our website.

www.smith-nephew.com

Our Code of Conduct and Business Principles are available on our website

www.smith-nephew.com

![img-11.jpeg](img-11.jpeg)

![img-12.jpeg](img-12.jpeg)

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# Helping a parent back to a normal life

Life Unlimited

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![img-13.jpeg](img-13.jpeg)

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# For a healthy and sustainable future

Our sustainability strategy is built on our purpose - Life Unlimited, our Strategy for Growth and our culture of Care, Courage and Collaboration.

![img-14.jpeg](img-14.jpeg)

## Protecting the future

Through our Strategy for Growth we are working to strengthen the foundation of our business to serve customers sustainably and simply, to accelerate profitable growth through prioritisation and customer focus, and to transform our business through innovation and acquisition.

Our Strategy for Growth is underpinned by our Capital Allocation Framework, which has as its first priority investing in innovation and our sustainability agenda. You can read more about our Strategy for Growth on pages 8-11, and our Capital Allocation Framework on pages 19-20.

We strive to deliver our sustainability strategy in the communities where we live and work through the application of our values:

- We demonstrate **Care** by respecting our global resources and striving to protect the safety and wellbeing of our employees.
- We demonstrate **Courage** by setting ambitious goals to increase our volunteerism, reduce waste and greenhouse gas emissions, and by operating responsibly and sustainably.
- We demonstrate **Collaboration** by working together with our partners who share our commitment and contribute to our communities through individual and team volunteerism.

Our sustainability strategy supports these value drivers by helping us to address the requirements of our stakeholders, creating a lasting positive difference to our communities, and protecting our environment.

Our sustainability strategy is inspired by the United Nations' Sustainable Development Goals (SDGs). It takes into account the social, environmental and economic aspects of our business and reflects the fact that sustainability and financial performance are closely linked. As a profit-seeking business, we aim to meet our economic objectives whilst at the same time managing the social and environmental impacts of our business activities.

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Our sustainability strategy focuses on three areas: People, Planet and Products. Our targets and progress against these are summarised on pages 59-63.

## People

Creating a lasting positive impact on our communities

## Planet

Aiming to reduce our impact on the environment

## Products

Innovating sustainably

## Our stakeholders' priorities

Through our sustainability strategy we are addressing the needs and expectations of our stakeholders.

### Customers

Building sustainability principles into the delivery of healthcare is of growing importance to our customers. Increasingly, customers require us to provide details of our sustainability strategy and targets. Customers place increasing importance on these responses when making contract decisions.

### Employees

Employees are looking for companies with strong values and culture, that operate with integrity, transparency and accountability, and offer satisfying career opportunities for all. Living our values and being a force for positive change is part of our sustainability strategy.

### Investors

Investors are prioritising investments based on corporate ESG programmes and outputs. Our sustainability programme provides evidence of our progress in these areas.

### Communities

The communities where we are located want to see support for local education, health and volunteer programmes from businesses which operate there. Our sustainability strategy prioritises giving back to local communities, for example through employee volunteering programmes.

![img-15.jpeg](img-15.jpeg)

## What our customers are asking

We aim to address the questions our customers are asking us through our disclosures in this Annual Report, and the more extensive disclosures and narrative in our Sustainability Report, available on our website www.smith-nephew.com.

What is your sustainability strategy and how does it help us achieve ours?

Can you help us meet our net zero targets?

Do your products use reusable plastics?

How do you ship products?

How does your local manufacturing operation reduce carbon?

What are you doing locally to reduce carbon emissions?

How will you reduce and minimise single-use plastic?

How are you reducing carbon emissions in your supply chain?

What materials make up your packaging?

Can you use cardboard instead of plastic for transit protection?

Why do you ship so much air in your packaging?

Read more about our stakeholders

![img-16.jpeg](img-16.jpeg)

More information on our activities can be found in our 2022 Sustainability Report available on our website.

www.smith-nephew.com

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For a healthy and sustainable future continued

## Sustainability governance

In January 2023, we streamlined the governance and operational structure around the delivery of our ESG strategy. We established the ESG Operating Committee to implement and execute our ESG strategy across all business areas, reporting directly into the Executive Committee. The Executive Committee will continue to formulate and drive our ESG strategy with oversight from the Board and its Committees.

The Board reviews the sustainability strategy, key risks and opportunities and progress on a regular basis and three Board Committees review implementation: Compliance & Culture Committee, Audit Committee and Remuneration Committee. For further information on our governance see the Governance Report from page 84 and our Task Force on Climate-related Financial Disclosures (TCFD) reporting on pages 64-67.

Our sustainability strategy focuses on three areas: People, Planet and Products. Within these three areas we have developed comprehensive targets to help us deliver on our sustainability ambitions. Each year we measure and report progress against these targets. We recognise that in some areas, such as employee volunteering and product donations, we are behind where we expected to be at this stage. During 2023, we intend to review options to ensure our targets remain meaningful. In 2022, we revised our Products supply chain due diligence target (see page 62).

We are proud of our many achievements over the years, including our recurring inclusion in leading indices, such as FTSE4Good, ISS and the Dow Jones Sustainability Index. We achieved an 'A' rating in the most recent MSCI ESG Ratings.

We have reported our 2021 baseline Scope 3 greenhouse gas (GHG) emissions from eight categories and are developing our Scope 3 GHG emissions reduction roadmap in preparation for submitting this to the Science Based Target initiative (SBTi) for validation.

## Climate change

During 2022, we have continued to consider the potential impact of climate change on our business operations. The Group announced its plans to build a new Advanced Wound Management facility at Melton, on the outskirts of Hull (UK). The new facility sits at a higher elevation and is further inland, and accordingly has a significantly lower exposure to sea-level rise compared to the current site. The Group also opened its new manufacturing facility in Malaysia. The internal compound road level and internal floor levels of the facility were all raised to a height of 3 metres or more above sea-level to mitigate against the impacts of rising sea levels.

Our physical assets and supply chains are vulnerable to weather and climate change, for example through sea-level rise, more frequent extreme weather events and more severe extreme weather events. Patients are vulnerable to a potential rise in infectious disease propagation. Governments and corporations alike are under increasing pressure to mitigate the expected effects of climate change, potentially resulting in infrastructure projects which would require large capital outlays and further increase pressure on healthcare payments.

In 2021, we made a commitment to net zero. It is in our roadmap to achieve net zero Scope 1 and Scope 2 GHG emissions by 2040 and net zero Scope 3 GHG emissions by 2045, beginning by achieving a 70% reduction in Scope 1 and Scope 2 GHG emissions by 2025.

We are on track to achieve a 70% reduction in Scope 1 and Scope 2 GHG emissions by 2025 compared to the 2019 baseline.

We aim to minimise the disruption to our manufacturing and distribution network. We understand how important it is to balance environmental initiatives with business activities, and strive to reduce emissions through new technology development, renewable energy use and other measures.

Our facilities in Memphis (US), our single largest manufacturing location, continued to source electricity from renewable wind energy in 2022, accounting for over 40% of our Group's total electricity usage.

Our reporting against the TCFD framework and the Sustainability Accounting Standards Board (SASB) framework for our sector of Medical Equipment and Supplies can be found on pages 64-67 and 250-251 respectively. The Compliance & Culture Committee and the Audit Committee received updates on TCFD and SASB reporting during 2022.

As part of our Enterprise Risk Management process, we have a sustainability risk register and a business resilience process review built into our review of our Principal Risks (see pages 71-77). Our Principal Risks capture our physical and transitional climate-related risks in our Enterprise Risk Management process. We believe climate change is not currently a Principal Risk for Smith+Nephew as we do not expect it to fundamentally alter the demand for our products or our ability to manufacture and supply them. However, we will continue to monitor and mitigate risks as appropriate.

Read our TCFD reporting

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![img-17.jpeg](img-17.jpeg)

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# People

## Creating a lasting positive impact on our communities

| Our targets | Our progress in 2022 | Progress since 2020 baseline |
| --- | --- | --- |
| Between 2020 and 2030, contribute 1 million volunteer hours to the communities in which we live and work. | 11,500 hrs | 29,500 hrs |
| Between 2020 and 2030, donate $125 million in products to underserved communities. | $5.0m | $11.1m |
| Empower and promote the inclusion of all . | 10 Global Employee Inclusion Groups are now established. | 3,000+ Employees now engaged with Employee Inclusion Groups. |

### People are at the heart of our purpose - Life Unlimited.

We prioritise people in three ways:

- We support our own employees' wellbeing by ensuring their work environment is healthy and safe, and by continuing to build employee wellness programmes that enable healthy life choices.
- We help improve patients' wellbeing and empower the healthcare professionals who treat them.
- We engage with the communities where we operate. We encourage our people to volunteer in local communities, offer paid volunteering time and match eligible employees' charitable donations up to $500 per employee on an annual basis. We have continued to offer additional volunteering for employees with healthcare training to serve on the front line when crisis response is needed, as it was during the pandemic

Our giving activities during the year totalled donations of $5.16 million. These consisted of $5.03 million in product donations, including $3.5 million of wound care products to support those affected by the war in Ukraine, and $0.13 million from matching employee gifts to qualified charities. Since inception in 2020, our employee volunteering and product donation strategies have been held back by the impacts of Covid.

Employee engagement is important to us and is measured by the Gallup Global Engagement Survey (see pages 48-49). Our Employee Inclusion Groups (EIGs) continued to flourish during the year, promoting inclusion, and we strengthened our wellness programmes, including additional support to help employees facing an increased cost of living.

Read about our culture

![img-0.jpeg](img-0.jpeg)

### Encouraging STEM careers with Migrant Leaders

In 2022, Smith+Nephew partnered with Migrant Leaders, an independent UK charity that "inspires and develops disadvantaged young migrants across the UK to broaden their horizons and capture opportunities well beyond their aspirations". Young adults studying in sixth form were invited to spend the day at the Smith+Nephew Academy London, where they toured the facilities, learned about our business and products, and discovered the range of science, technology, engineering and mathematics (STEM) careers available at Smith+Nephew.

![img-1.jpeg](img-1.jpeg)

### Responding to the war in Ukraine

In 2022, in partnership with the Polish Red Cross, we donated over $3.5 million of wound care products to support those impacted by the war in Ukraine. Additionally, we have matched individual employee donations and provided extra support to colleagues in Poland, many of whom opened their homes to refugees.

Our colleagues in Russia continue to work to provide our products to patients in need; we believe all people deserve to live their lives fully and peacefully.

We donated all profits from our Russian business in 2022 to humanitarian causes through International Red Cross and Médecins Sans Frontières.

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For a healthy and sustainable future continued

# Planet

## Aiming to reduce our impact on the environment

| Our targets | Our progress in 2022 | Progress since 2019 baseline |
| --- | --- | --- |
| Achieve net zero Scope 1 and Scope 2 GHG emissions by 2040 and Scope 3 GHG emissions by 2045, beginning by achieving a 70% reduction in Scope 1 and Scope 2 GHG emissions by 2025. | A carbon reduction roadmap for Scopes 1 and 2 through 2025 has been developed and a roadmap for Scope 3 is being developed. We have calculated baseline 2021 Scope 3 emissions data. Scopes 1 and 2 (total) 73,985 tonnes CO 2 e emitted (location-based) 1 48,847 tonnes CO 2 e emitted (market-based) 1 Our manufacturing sites in Malaysia and Suzhou have installed solar photovoltaic panels and will start generating on-site renewable energy in early 2023. Scope 3 1.6 million tonnes CO 2 e emitted | Scopes 1 and 2 (total) 4% reduction CO 2 e emitted (location-based) 1 27% reduction CO 2 e emitted (market-based) 1 All Sites in Memphis continued to source renewable electricity. |
| Achieve zero waste to landfill at our facilities in Memphis and Malaysia by 2025 and at all our strategic manufacturing facilities by 2030. | 1,473 tonnes Waste sent to landfill from the Group. 1 Our Malaysia facility has achieved zero waste to landfill. The Memphis facilities sent 1,106 tonnes of waste to landfill compared to 1,462 tonnes in 2019. | 26% Less waste was sent to landfill during 2022 compared to 2019. The Memphis facilities sent 24% less waste to landfill. |

We recognise the need to protect our planet and help mitigate against the impacts of climate change. In response, we manage resources efficiently, reduce our emissions where possible and are mindful of the impact our decisions have on the environment.

In 2022, our impact on the environment continued to be affected by the global pandemic, with many colleagues choosing to adopt remote or hybrid working. Accordingly, some offices continued to see lower occupancy levels. Combined home and office-working can have a higher environmental impact as the conditioning of our buildings is often independent of occupancy levels.

Along with our customers and stakeholders, we work to manage the environmental footprint of our products and services. Internally, we have made progress over several years, improving our performance in waste recycling, water use and GHG emissions.

We are mindful of the importance of biodiversity, particularly in some of the countries in which we operate including Costa Rica and Malaysia. The impact on local biodiversity is one of our considerations when we approve capital expenditure within our Global Operations business. Biodiversity will also be considered in the planning for our new Advanced Wound Management facility at Melton (UK) including impacts on the local landscape, ecosystems and climate stability.

### Tree-planting in the UK

Our Hull Leadership Council worked with the Plant A Tree Today (PATT) foundation to provide a new woodland for the local community. Over 150 employees participated, representing around 600 volunteering hours clearing 10 acres of land owned by a charitable trust in Cottingham and planting over 6,000 trees over a five-day period.

![img-2.jpeg](img-2.jpeg)

1 Data independently assured by ERM CVS, more details and the full assurance statement are available in the 2022 Sustainability Report on pages 60-61.

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## Reducing our GHG emissions

Our approach to reducing emissions includes tackling energy efficiency, generating our own renewable energy, and sourcing lower-carbon energy.

In-line with our long-term target to achieve net zero emissions by 2045, we have been working with our global energy partner. We have assessed our Scope 1 and Scope 2 GHG emissions and formulated a carbon reduction roadmap for key locations, aimed at reducing them by 70% by 2025 compared to a 2019 baseline. During 2022, we calculated our 2021 baseline Scope 3 GHG emissions for eight categories, and in 2023 we plan to develop a roadmap for reduction. See page 68 for more details.

In 2022, we continued to source renewable wind energy for all our locations in Memphis (US). This is significant, as the Memphis sites consume over 40% of the Group's total electricity. Sourcing renewable energy reduces our market-based GHG emissions, ie the emissions from the electricity we purchase.

In support of our carbon reduction roadmap steps and our roadmap to net zero, we have installed solar photovoltaic panels at two of our manufacturing sites in Asia. We have installed a 1.7 megawatt (MW) capacity system in Suzhou (China) and a 1.4 MW system in Malaysia. Both systems will be operational in early 2023. We expect the two solar-powered systems to reduce our Scope 2 GHG emissions by over 2,000 tonnes of CO2e in 2023 and beyond.

## Highlights

Installation of new solar photovoltaic panels at our manufacturing sites in Asia

2 sites

Expected reduction in annual Scope 2 GHG emissions in 2023 and beyond

2,000 tonnes

![img-3.jpeg](img-3.jpeg)

## Our Scope 1 and Scope 2 carbon reduction roadmap steps

We have been working with our global energy partner to develop a carbon reduction roadmap aimed at delivering our sustainability targets in the short, medium and long term. These are defined as within one year, within three years and after more than three years respectively. Following a detailed carbon emissions benchmarking project, again with our global energy partner, the roadmap identified the following initiatives:

In order of priority

| Carbon emissions benchmarking | Energy efficiency | On-site renewables | Power purchase agreements | Renewable energy certificates |
| --- | --- | --- | --- | --- |
| Establish an accurate benchmark for Scope 1 and Scope 2 GHG emissions. Complete. | Conduct energy efficiency studies at major sites. We carried out energy efficiency audits in Memphis and Costa Rica during 2022. | Implement on-site solar energy generation. Solar energy generation projects in Malaysia and Suzhou (China) are expected to be operational in early 2023. | Long-term agreement (10+ years) to buy power from new renewable resources. We are investigating global opportunities to source power purchase agreements. | Procure renewable energy certificates (RECs) for remaining consumption. RECs purchased in Memphis and Malaysia. |

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For a healthy and sustainable future continued

# Products

## Innovating sustainably

### Our targets

By 2022, include sustainability review in New Product Development (NPD) phase reviews for **all new products** and product acquisitions.

By 2025, incorporate **at least 30%** post-consumer recycled content into all non-sterile packaging materials.

By 2025, incorporate packaging materials from **sustainable sources** for new packaging parts.

By 2025, complete a focused risk-based due diligence of our **Tier 1 suppliers**, including risk-based analysis of sub-tier suppliers, to assure compliance with our sustainability requirements.a

### Our progress in 2022

#### Complete.

Sustainability is embedded as part of our NPD phase review process, ensuring that we discuss, consider and implement sustainability in our design of new products.

Identified US-based paper board for packaging that contains up to 30% recycled content. Formal testing is planned to start in 2023. On successful completion of testing, non-sterile material specifications will be updated to allow the use of this material before the 2025 target.

Established packaging sustainability strategy and roadmap. Supply chain challenges continued to limit our ability to pursue innovative, more sustainable materials.

We have completed due diligence and assessments of all Tier 1 suppliers according to our risk-based procedure.

We have implemented a supplier on-site audit programme for suppliers identified through risk-based analysis. On-site audits include worker interviews and practical assessment of the implementation of supplier policies and procedures to assure compliance with modern slavery, human trafficking, HSE and sustainability requirements.

**We aim to develop products with sustainable attributes, increase access to care, improve our environmental impact and reduce costs. Manufacturing and supplying safe and effective products is at the heart of our business.**

Our people, processes and technology are structured to support progress toward the goal of innovating sustainably. All these key product attributes are 'locked in' during new product development or product acquisition and are difficult to change later.

We have integrated a sustainability review into our NPD process to ensure that we intentionally discuss, consider and implement sustainability and efficiency in our product design. This will ensure that our future product portfolio becomes one that has intentional consideration for material and energy usage during production, the recyclability of waste products and a reduced product footprint for shipping and transportation.

Our customers are increasingly requesting information on the chemical components and recyclability of our products and packaging. Our focus on products will assist our customers in reaching their sustainability goals.

Packaging sustainability to minimise environmental impact, both for new products and our existing portfolio continues to be a key area of opportunity, as does moving to digital Instructions For Use (IFU). An initiative to reduce packaging dimensions for our ALLEVYN® LIFE Foam Dressings is shown on page 63, this resulted in reduced volumes of packaging materials being used and lower GHG emissions.

By 2025, we aim to have completed a focused risk-based due diligence of our Tier 1 suppliers, including a risk-based analysis of sub-tier suppliers. Supplier risk criteria include country, commodity and spend, and we have updated our global process for managing Corporate Social Responsibility (CSR) supplier risk. In 2022, we completed internal screening due diligence with 100% of our Tier 1 suppliers with additional due diligence with identified potential high-risk Tier 1 suppliers.

a We have revised our Products supply chain due diligence target as a result of a strategic and operational review which took into account a range of factors including the impact of the pandemic on access to supplier locations, supplier resources and availability of data sets required to verify compliance with the target. We will continue to take a risk-based, proportionate approach to supply chain verification in compliance with all applicable laws and regulations. We will also continue to drive continuous improvement in our programmes in line with guidance and we will continue dialogue with suppliers to proactively guide improvement in their approach to sustainability, aligned with our policies and procedures.

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# Packaging material for our
bordered dressings reduced by
334 tonnes

![img-4.jpeg](img-4.jpeg)

# Less waste, more care

Daily wound care practice involves the
routine use of supplies that, in turn, creates
substantial amounts of packaging waste.
With a focus on reducing carbon emissions
and respectful use of global resources,
our Advanced Wound Management business
spearheaded a 2022 initiative to optimise
packaging across a range of dressings.

The new reduced packaging dimensions
eliminate some of the 'air' that was being
shipped therefore reducing the overall
volume of packaging being used. The redesign
will eliminate the need for 334 tonnes of
packaging material for our bordered dressings,
equating to 2.7 million square metres.
Ultimately, this could save 92 tonnes of
GHG emissions (equivalent to 13 car trips
around the globe) when compared to 2021.1,2

Retaining the same high standards
of manufacturing and sterilisation, as an
example, the ALLEVYN LIFE Foam Dressings
will now use 28% less packaging material
compared to our 2021 design.1

For healthcare practices and clinicians,
we hope this translates to efficiencies in
the use of storage space and alignment
with their own sustainability objectives.

![img-5.jpeg](img-5.jpeg)

1 Smith+Nephew 2022. Internal report CSD. AWM.22.064.
2 Smith+Nephew 2022. Internal report CSD. AWM.22.072.
3 Smith+Nephew 2022. Internal report CSD. AWM.22.045.

Smith+Nephew Annual Report 2022

# Net zero

Organisations around the world are
making pledges to reduce GHG emissions.
These commitments can play a key role
in achieving the Paris Agreement, which
aims to curb global emissions enough to
cap global mean temperature increase to
1.5-2°C relative to the pre-industrial era.
'Net zero' means that the activities within
a company's value chain result in no net
impact on the climate from GHGs.

# Committed to net zero

In 2021, we made a commitment to
net zero. It is in our roadmap to achieve net
zero Scope 1 and Scope 2 GHG emissions
by 2040 and Scope 3 GHG emissions
by 2045. We are on track to achieve a
70% reduction in Scope 1 and Scope 2
GHG emissions by 2025 compared to
a 2019 baseline.

Our facilities in Memphis (US), our single
largest manufacturing location, continued
to source electricity from renewable
wind energy, accounting for around
40% of our total electricity usage.

Our roadmap to net zero is outlined below.
These are our current targets and actions,
which will be updated in the coming years
as our plans develop.

# Our net zero targets

Achieve Scope 1 and Scope 2
net zero GHG emissions by
2040

Achieve Scope 3 net zero
GHG emissions by 2045

Begin by reducing Scope 1
and Scope 2 GHG emissions
by 70% by 2025

# Roadmap to net zero

# What we have completed in 2022

- Conducted a detailed analysis of our energy usage data.
- Actioned our carbon reduction roadmap (see page 61).
- Measured and reported our 2021 baseline Scope 3 GHG emissions from eight categories.
- Sourced renewable electricity for our manufacturing facility in Memphis (US) and installed solar photovoltaic panels to generate renewable electricity in Malaysia and Suzhou (China) (see page 61).

# What we are currently doing

- Preparing a carbon reduction roadmap to reduce Scope 3 GHG emissions.
- Sourcing renewable energy opportunities at all our strategic manufacturing sites.
- Converting our European and UK leased car fleet to electric vehicles (EVs).
- Expanding our supplier engagement through CDP.
- Launching a salary sacrifice scheme in the UK to enable employees to drive EVs.

# What we expect to do next

- Implement renewable electricity at all our strategic manufacturing sites by 2025.
- Convert our remaining global leased car fleet to electric vehicles.
- Encourage our suppliers to set their own net zero targets.

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For a healthy and sustainable future continued

# TCFD reporting

Pages 64-67 set out Smith+Nephew's disclosures which are consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) framework. By this we mean the four TCFD recommendations and the eleven recommended disclosures set out in Figure 6 of Section B of the report entitled 'Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures' published in October 2021 by the TCFD.

Board:

- Oversight of sustainability strategy and risk management programme.

Audit Committee:

- Oversight of the risk management process and reviewing its operating effectiveness.
- Receives regular updates on sustainability and climate-related financial risks and opportunities.
- Assesses whether climate change has a material impact on our financial statements.
- Ensures the Company reports in line with the recommendations of the TCFD framework.

Compliance & Culture Committee:

- Oversight of sustainability policy and performance versus targets, with reviews undertaken at each committee meeting.
- Receives regular updates on sustainability and climate-related risks and opportunities.

Remuneration Committee:

- Oversight and review of sustainability metrics within Remuneration Policy, and compensation and incentive plans generally.
- Determined that effective from the 2022 financial year, 5% of the Annual Bonus Plan for Executive Directors would be dependent on the achievement of ESG targets.

Executive Committee:

- Driven by the Chief Executive Officer, determination and management of sustainability strategy, with President Global Operations accountable for leading the implementation of the sustainability strategy.
- Ensures that sustainability risks and opportunities are included in decision making as part of each project, initiative and the 12-point plan.

Sustainability Council:

- Develops and implements our sustainability strategy.
- Responsibility for setting, implementing and achieving operational objectives, KPIs and targets.
- Membership includes: Human Resources, Global Operations, Quality and Regulatory Affairs, Research & Development, Public Policy & Government Affairs, Commercial, Finance, Procurement and Supply Chain.
- The Sustainability Council ceased to operate in January 2023 as a result of changes to the governance structure. See page 65 for details of the ESG Operating Committee that was established in January 2023.

Audit Committee membership

Compliance & Culture Committee membership

Remuneration Committee membership

Executive Committee membership

# Governance

The way in which we evaluate, manage and embed sustainability within our business and culture is directly linked to our Strategy for Growth through a focus on People, Planet and Products. Oversight of our sustainability strategy is one of the Matters Reserved to the Board. The Board reviews the sustainability strategy, key risks and opportunities, and progress on a regular basis and approves the Sustainability Report annually and reviews and approves the sustainability, TCFD and SASB reporting in the Annual Report.

Three Board Committees are also closely involved in reviewing the elements of sustainability that impact the key areas of our business. All Committees receive regular updates on sustainability strategy, implementation, objectives and targets, and climate-related financial risks and opportunities. The Committee Chairs report to the Board at each Board meeting:

- The Compliance & Culture Committee, chaired by Marc Owen, assesses how we implement our sustainability strategy in the core areas of People, Planet and Products, encompassing the Group's impact on employees, the environment, the local communities in which it operates, customers, suppliers and other key stakeholders. The Compliance & Culture Committee also tracks progress of the delivery on sustainability objectives and metrics, including a regular review of our net zero emissions progress at each Committee meeting.
- The Audit Committee, chaired by Rick Medlock, is responsible for ensuring oversight of the process by which risks relating to the Group and its operations are managed and reported. The Audit Committee assesses the extent to which climate change and other sustainability risks are likely to have a material impact upon our financial statements by reviewing the possible impact of different scenarios related to climate change.
- The Remuneration Committee, chaired by Angie Risley, is responsible for ensuring that the Remuneration Policy and related incentive schemes incorporate sustainability targets and metrics where appropriate to do so.

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Our Chief Executive Officer sets strategy together with the Executive Committee, and President Global Operations is responsible for the implementation and regularly reports on our progress to the Board, its Committees and our Executive Committee. In January 2023, we streamlined the governance and operational structure around the delivery of our ESG strategy. We established the ESG Operating Committee to implement and execute our ESG strategy across all business areas, reporting directly into the Executive Committee. The Sustainability Council no longer operates as a result of the changes to the governance structure. The Executive Committee will continue to formulate and drive our ESG strategy with oversight from the Board and its Committees.

Smith+Nephew leaders consider sustainability risks and opportunities in their decision making. For example, when evaluating options for new or extensions of manufacturing sites in Malaysia, UK and Costa Rica, analysis of sustainability requirements and risks was undertaken as part of the project and decision making. In addition, papers which are submitted to the Board by management for review include an analysis of sustainability issues and opportunities where appropriate to enable the Board to consider these factors in decision making and to ensure effective Board oversight on sustainability strategy, risks and opportunities. Detailed information on our sustainability risks can be found in our Sustainability Report.

## Strategy

Our sustainability strategy is built on our purpose - Life Unlimited, our Strategy for Growth and our culture of Care, Courage and Collaboration. Our sustainability strategy, which was developed by our Sustainability Council in 2019 and approved by the Board, is inspired by the United Nations' Sustainable Development Goals. Our strategy reflects the importance of social, environmental and economic aspects of sustainable development.

Our Principal Risks capture our physical and transitional climate-related risks in our Enterprise Risk Management (ERM) process:

- Business continuity and business change: impact to our business due to severe weather patterns, global temperature rise and sea-level rise.
- Commercial execution: inability to satisfy customers' sustainability requirements and expectations.
- Global supply chain: severe weather patterns as a result of climate change cause damage to manufacturing or distribution facilities impacting ability to meet customer demand.
- Legal and compliance: failure to identify existing or new legal or regulatory requirements including sanctions programmes and ESG matters which result in non-compliance with applicable laws and regulations. Failure to meet the needs of stakeholders relating to increased focus on and regulation of ESG reporting requirements.
- New product innovation, design & development including intellectual property: sustainability in new products.
- Political and economic: failure to meet the sustainability targets and public policy changes.
- Pricing and reimbursement: limited ability to pass on the cost of sustainability improvements.
- Quality and regulatory: failure to meet stakeholder expectations with regard to increasing sustainability regulations and reporting requirements.

The transitional and physical risks above are primarily expected to occur over the long term (as defined on page 66). Based on the work undertaken to date, these risks are not expected to have fundamental impacts on our business model. See page 66 for further details.

We address climate-related risk primarily through business strategies in our global operations functions including facilities, health & safety and business continuity management. Refer to the Risk Management section on page 66 and the Risk report on page 69 for more details on our risk management process.

## Climate-related opportunities:

Climate-related opportunities are identified and addressed through our sustainability strategy and programmes. Through this process we have identified a number of climate-related opportunities relating to energy sourcing, energy efficiency and packaging reduction initiatives.

In 2020, all our locations in Memphis (US) began sourcing electricity from renewable wind energy via the procurement of renewable energy certificates (RECs) and this has continued through 2022. We completed construction of our Malaysia facility in 2021, and have now completed the installation of solar photovoltaic panels on site. Similarly at our facility in Suzhou (China) we have installed solar photovoltaic panels to generate on-site renewable energy. We expect both systems to be fully operational in early 2023. In December 2022, we sourced additional renewable energy via the procurement of RECs in Malaysia. The UK sites have sourced a green tariff for the supply of electricity from renewable sources beginning in October 2023.

In 2021, we aligned with the recommendations of the Intergovernmental Panel on Climate Change and published our commitment to achieve net zero Scope 1 and Scope 2 GHG emissions by 2040 and Scope 3 GHG emissions by 2045, beginning by achieving a 70% reduction in Scope 1 and Scope 2 GHG emissions by 2025. We understand how important it is to balance environmental initiatives with business activities and strive to reduce emissions through new technology. We have conducted a review of our current state and captured related business risks in our risk register.

Energy efficiency audits have been carried out at sites in Memphis (US) and Costa Rica. All of the 'easy to implement' recommendations have been carried out and the remaining recommendations have been added to improvement action plans.

The new UK site at Melton, on the outskirts of Hull, will be designed to high sustainability standards with a focus on energy and resource efficiency. The site aims to generate on-site renewable energy.

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## For a healthy and sustainable future continued

### TCFD reporting continued

#### Scenario analysis:

The 2021 scenario analysis focused on our critical manufacturing sites and modelled the potential financial impact of three scenarios:

- - a global temperature rise of at least 4°C; and

The modelling focused on the material impacts on our business and was based on our current business activities and assumed no mitigation. Based on the analysis undertaken, global temperature rise and extreme weather were not expected to have fundamental impacts on our business model. However, we noted that the Group has a number of manufacturing sites in coastal locations which are at low elevations and these could be impacted by a 5-metre sea-level rise. Existing flood defences are expected to mitigate any near-term impacts and the longer-term impact on the Group's manufacturing footprint is an area of focus being taken into account in our manufacturing strategy.

Based on our high level assessment, the impact of a 2°C global temperature rise is not expected to have a material impact on our business. As outlined on page 65, our physical and transition risks are captured in our ERM process. Refer to our Risk Report on page 69 for further details.

Further work was undertaken in 2022 to better understand the full impact of potential sea-level rises and whether any remedial action is necessary and over what time frame. We noted that in 2013 our Hull (UK) facility was impacted by highly unusual levels of flooding, with the site incurring damage across its entire ground floor, including in the manufacturing facility and office areas. Since then, we have invested £3 million into new flood defences to help protect the site against repeat events. Based on a number of considerations, including sea-level rise, the Group announced in 2022 its plans to build a new Advanced Wound Management facility at Melton on the outskirts of Hull. The new facility sits at a higher elevation and is further inland, and accordingly has a significantly lower exposure to sea-level rise compared to the current site. The facility will be designed to high sustainability standards with a focus on energy and resource efficiency.

In 2022, the Group opened its new high technology manufacturing facility in Malaysia. The internal compound road level and internal floor levels of the facility were all raised to a height of 3 metres or more above sea-level to mitigate against the impacts of rising sea-levels.

During 2022, we expanded our scenario analysis to better understand the exposure of more than 30 facilities to extreme climate events. This analysis continues to support the prior year conclusions that global temperature rise and extreme weather are not expected to have fundamental impacts on our business model, while work continues on determining the full impact of sea-level rises on our manufacturing footprint and whether any further remedial action is necessary and over what time frame.

In 2022, we began preparations to screen and identify suppliers in order to better understand how to incorporate them into our scenario analysis. This work will continue into 2023 to better inform our strategic and financial planning.

#### Risk management

Climate-related risks are managed through our comprehensive risk governance framework. At the top of our structure, the Board sets our risk appetite and monitors the application of our risk framework, including strategy, execution and outputs of risk reviews by the business and the Group Risk team. The Board cascades our risk appetite throughout our organisation through the Executive Committee, the risk owner community and our management group. A formal 'bottom-up' exercise ensures that risks are escalated back through the process to our Board and are reflected in our Principal Risks as appropriate. Refer to pages 69-70 for more detail.

#### Climate-related risks

We identify climate-related risks based on short-, medium- and long-term horizons. We consider short term to be within one year, medium term to be within three years and long term to be greater than three years. Short-term risks are captured in our annual financial planning process; medium- and long-term risks are captured within our global footprint planning process.

In 2021, we revised our annual and three-year financial planning, and our capital expenditure planning processes to begin to require climate-related risk information and specific sustainability considerations.

We maintain a separate sustainability risk register where risk owners consider how sustainability and climate risks affect our Principal Risks. These are managed through our ERM process. In 2022, we ran a cross-functional sustainability workshop where risk champions brainstormed and discussed how climate change and sustainability risks could impact their Principal Risks and business areas. After assessing our business activities, we have determined that climate change is not currently a Principal Risk to the business as we do not expect climate change to fundamentally alter the demand for our products or our ability to manufacture and supply them. As outlined on page 65, our Principal Risks capture climate-related risks in our ERM process. Detailed information on our ERM process can be found on page 69 of the Annual Report and in our Sustainability Report.

#### Metrics and targets

We have published an annual Sustainability Report since 2001 detailing progress against our global targets. We have targets in each of our priority areas: People, Planet and Products. Our key climate-related metrics are greenhouse gas emissions and waste to landfill. Our key targets in relation to these metrics are net zero greenhouse gas emissions by 2045 and zero waste to landfill at our strategic manufacturing facilities by 2030. Detailed information about our targets and progress made against those targets can be found on pages 59-63 of the Annual Report and in our Sustainability Report. The Remuneration Committee determined that with effect from 2022, 5% of the Annual Bonus Plan for Executive Directors will be dependent on the achievement of ESG targets linked to our sustainability strategy.

We have mapped our Scope 1 and Scope 2 GHG emissions, and during 2022 we also began to map our Scope 3 GHG emissions in order to meet our target of reducing total life cycle GHG emissions to net zero by 2045. In 2021, we also established interim carbon reduction targets to 2025. See page 63 for details on our Scope 1 and Scope 2 net zero roadmap.

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In 2021, we worked with our global energy partner to model our Scope 1 and Scope 2 GHG emissions in line with scenarios limiting global temperature rises to 2°C and 1.5°C. The outputs of these analyses are being used to inform decisions and prioritise actions. In 2022, we published our 2021 baseline Scope 3 GHG emissions, including data from eight of the fifteen categories. Our Scope 1, 2 and 3 GHG emissions data are provided on page 68 of the Annual Report with more detailed information also available in our Sustainability Report.

In 2022, our location-based and market-based Scope 1 and Scope 2 GHG emissions reduced by 4% and 27% respectively compared to 2019, and we sent 26% less waste to landfill compared to 2019. We did, however, see a small annual increase in energy usage and market-based GHG emissions as a result of the new facility in Malaysia opening and further expansion of our facility in Costa Rica.

During 2022, driver appetite for electric vehicles continued to grow. In the UK, over 26% of our leased car fleet is now fully electric and over 45% of new cars on order, awaiting delivery, are electric vehicles. Fully electric business miles driven in the UK since the introduction of electric vehicles in 2021 are now in excess of 650,000. In addition to the UK, the electric vehicle policy is now implemented in the Netherlands, Denmark, Finland, Norway, Sweden, Germany and Ireland, and is in progress in France and Spain.

The in-country charging infrastructure and the current supply chain issues for the delivery of new vehicles has hindered the speed of the transition as we estimate approximately 6% of the European leased car fleet is now fully electric. This is a great step towards our commitment to achieve net zero carbon emissions. In addition, our employees view this as a positive way to help them reduce their own personal carbon footprint. Being able to choose fully electric vehicles has brought increased motivation and satisfaction among our company car driver population.

In January 2023, we launched a salary sacrifice scheme to make electric vehicles available to all employees in the UK. With electric vehicle chargers in place at the majority of our UK offices and manufacturing facilities, all employees are being encouraged to commute with more consideration for the environment.

# CO2e reporting methodology, materiality and scope

We report the carbon footprint of our Scope 1 and Scope 2 GHG emissions in tonnes of CO2 equivalent from our business operations for the year ended 31 December 2022. We are including UK specific energy and emissions data to satisfy the Streamlined Energy and Carbon Reporting (SECR) requirements. We also report our 2021 baseline Scope 3 GHG emissions.

Our focus is on the areas of largest environmental impact, including manufacturing sites, warehouses, R&D sites and offices. Smaller locations representing less than 2% of our overall emissions are not included. Acquisitions completed before 2022 are included in the data, with more recent ones excluded. This is in-line with our established policy for the integration of acquired assets.

Our GHG emissions reporting represents our core business operations and facilities that fall within the scope of our consolidated financial statements. Primary data from energy suppliers has been used wherever possible.

We report our emissions in three scopes:

- Scope 1: Direct sources of emissions which mainly comprise the fuels we use on-site, such as gas and heating oil, and fugitive emissions arising mainly from the losses of refrigerant gases. We have included UK vehicle emissions from leased cars since 2020.
- Scope 2: Indirect sources of emissions such as purchased electricity and steam we use at our sites.
- Scope 3: Indirect value chain emissions that arise as a result of activities from assets or processes not owned or controlled by Smith+Nephew, these can be further divided into upstream and downstream emissions and fall into 15 defined categories. During 2022, we have worked on assessing our 2021 baseline Scope 3 GHG emissions and have data available for eight categories.

Location-based emissions are calculated in compliance with the WRI/WBCSD GHG Protocol Corporate Accounting and Reporting Standard and have been calculated using carbon conversion factors published by BEIS/Defra for 2022.

We have applied the emission factors most relevant to the source data, including Defra 2022 (for UK locations), IEA 2020 (for overseas locations) and for the US we have used the most recently available US EPA 'Emissions & Generation Resource Integrated Database' (eGRID) for the regions in which we operate. All other emission factors for gas, oil, steam and fugitive emissions are taken from Defra 2022.

In line with dual-reporting we also report market-based emissions. These are contractual or supplier-specific emission factors that can be applied when procuring low-carbon energy or siting facilities in areas with lower emissions but also recognising that this might be higher than the grid average in some cases. Where market-based factors were not available, we have used 'Residual Mix' data for the EU locations and IEA data for all other countries, except for the remaining US locations where the eGRID factors were applied.

We have also implemented, or benefited from, numerous energy efficiency and low-carbon energy measures during 2022. Some of these savings include: independent energy audits; detailed analysis of our energy usage data to identify saving opportunities; the use of Building Energy Management Systems (BEMS) to control equipment for maximum efficiency; and the installation of solar photovoltaic panels in Malaysia and China.

We have also targeted the use of online 'real time' data to monitor energy usage to make savings. We have a programme to replace older inefficient equipment with highly efficient equipment, such as compressors, chillers, pumps, fans and motors.

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## For a healthy and sustainable future continued

### CO$_{2}$e reporting methodology, materiality and scope continued

This year we also continued to convert our company car fleet in Europe to electric vehicles where appropriate.

In Memphis during 2022, we purchased RECs through Green Flex, a voluntary renewable energy programme. Certified by Green-e Energy, North America's leading certification programme for renewable energy, Green Flex RECs are based on wind power generated in the Midwest US. Purchasing RECs gives buyers the right to renewable energy and also makes it possible to track ownership of it. Our participation in this scheme underscores our commitment to supporting renewable energy and helps to reduce our market-based carbon emissions footprint.

### Reporting our Scope 3 emissions

During 2022, we have worked with our global energy partner to measure our 2021 baseline Scope 3 GHG emissions for the first time using a recognised protocol, CEDA (Comprehensive Environmental Data Archive). Our estimation of our 2021 baseline Scope 3 GHG emissions was 1.6 million tonnes of carbon dioxide equivalent from the eight categories that we measured. We will increase the number of categories reported and refine the quantity as we continue to reassess our GHG emissions.

This estimate was from the best available 2021 data and is intended to be a baseline benchmark from which we will begin our Scope 3 carbon reduction journey. As expected, in line with our peer group, purchased goods and services contributes the most significant proportion of our Scope 3 GHG emissions, over 80%, which we believe will remain the case as we calculate more categories. Further details are available in the 2022 Sustainability Report on page 59. In 2023, we intend to prepare an emissions transition plan which will cover all three emission scopes.

### Independent assurance

In 2022, selected Scope 1 and Scope 2 GHG emissions data were independently assured by ERM CVS. The assurance covered both the current year and the 2019 baseline for Scope 1 and Scope 2 GHG emissions. More details and the full limited assurance statement can be found in the 2022 Sustainability Report on pages 60-61.

![Globe icon]() www.smith-nephew.com/sustainability

|  | 2022 |  |  | 2021 |  |  | 2019 (baseline year) |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | UK | Global (excluding UK) | Total | UK | Global (excluding UK) | Total | UK | Global (excluding UK) | Total |
| CO 2 e emissions (tonnes) from: |  |  |  |  |  |  |  |  |  |
| Direct emissions (Scope 1) 1 | 5,563 | 6,605 | 12,168 2 | 5,892 | 5,443 | 11,335 | 4,747 | 5,141 | 9,888 2 |
| Indirect emissions (Scope 2) (location-based) | 3,856 | 57,961 | 61,817 2 | 3,900 | 60,987 | 64,887 | 4,911 | 62,413 | 67,324 2 |
| Total (location-based) | 9,419 | 64,566 | 73,985 2 | 9,792 | 66,430 | 76,222 | 9,658 | 67,554 | 77,212 2 |
| Indirect emissions (Scope 2) (market-based) | 5,205 | 31,474 | 36,679 2 | 5,088 | 30,374 | 35,462 | 5,072 | 52,080 | 57,152 2 |
| Total (market-based) | 10,768 | 38,079 | 48,847 2 | 10,980 | 35,817 | 46,797 | 9,819 | 57,221 | 67,040 2 |
| Energy consumption to calculate Scope 1+2 emissions (GWh) | 49 | 188 | 237 | 49 | 183 | 232 | 45 | 168 | 213 |
| Intensity ratio (location-based): |  |  |  |  |  |  |  |  |  |
| CO 2 e (t) per $m sales revenue |  |  | 14.2 |  |  | 14.7 |  |  | 15.1 |
| CO 2 e (t) per full-time employee |  |  | 3.9 |  |  | 4.0 |  |  | 4.3 |
| Other indirect emissions (Scope 3) 3 |  |  |  |  |  | 1,614,573 |  |  |  |

1 UK vehicle data included in Scope 1 GHG emissions since 2020.

2 Data independently assured by ERM CVS, more details and the full assurance statement are available in the 2022 Sustainability Report on pages 60-61.

3 Estimation of 2021 Scope 3 GHG emissions from the eight categories measured. Refer to 'Reporting our Scope 3 emissions' above for more details. 2022 data includes recent acquisitions completed and new site openings during 2021.

Revenue: 2022: $5.2bn, 2021: $5.2bn, 2019: $5.1bn. Full-time employee data: 2022: 19,094; 2021: 18,976; 2019: 18,030.

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# Like all businesses, we face risks and uncertainties

## Our risk management process

Successful identification and management of existing and emerging risks is critical to the achievement of strategic objectives and to the long-term success of any business. Risk management is therefore an integral component of our Corporate Governance.

As in previous years our Enterprise Risk Management (ERM) process is based on a holistic approach to risk management. Our belief is that the strategic and operational benefits of proactively managing risk are achieved when ERM is aligned with the strategic and operational goals of the organisation. Our process and governance structure achieve this.

2022 has seen a further maturing of risk management. We introduced quarterly Risk Champion workshops focused on topics such as Data Privacy, Supply Chain and Sustainability, which increased awareness of risks and management actions across the Group. We implemented a new and easier to use central risk register system with built in quality checks to ensure consistency in the analysis and management of risk. We also developed data analytics and reporting dashboards to share regular ERM insights with Risk Champions and our Executive Management. Executive Committee risk owners report and discuss Principal Risk trends from an operational perspective in monthly Executive Committee meetings.

![img-0.jpeg](img-0.jpeg)

## Emerging risks

Executive Committee Risk Owners continue to scan the horizon for new and emerging risks and these are discussed and considered in the top down risk discussion. Emerging risks that were identified this year are covered within our existing Principal Risks and include:

- The impact of macroeconomic factors such as inflation and global recession. Similar to our peers in healthcare, we are limited in the extent to which we can pass increased costs onto customers and payers. We take steps to mitigate this risk through our pricing initiative in our 12-point plan.
- Localised lockdowns in China and the war in Ukraine impact our global supply chain and operations. This risk is being mitigated through initiatives in our 12-point plan.
- New and increased medical device regulations in the EU and globally will require increased resources in our priority markets and delays experienced in interactions with notified bodies may further compound the impact on our business. There has been a reduction in the capacity of notified bodies leading to an increase in registration timelines, which impacts our route to market. This risk is being managed under our Quality and Regulatory principal risk.
- Our customers, investors and other internal and external stakeholders are increasingly focused on our approach to Environmental, Social and Governance (ESG) matters and how we embed ESG considerations into all areas of our business. In 2022, we have responded to this increased interest by enhancing our ESG governance structure, ensuring that ESG considerations are taken into account in decision making processes and are reflected within each of our Principal Risks as appropriate.
- The competition for talent has impacted all employers globally. We are managing this risk by continuing to focus on various initiatives to ensure that our purpose and values are ingrained within the culture of the organisation which supports engagement, attraction and retention of new and existing employees.

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Risk report continued

# Risk management life cycle

Annual improvement and refinement of our risk management process ensures that it remains aligned with strategy and operations.

Our Risk Management Policy, sponsored by our Chief Executive Officer, is driven by an Enterprise Risk Management Manual and the Group Risk team providing training to Business Area Risk Champions. As in prior years, risks continue to be managed through a 'top-down' and 'bottom-up' process, with regular oversight from the Executive Committee and quarterly reports to the Board Committees.

An overview of our risk management life cycle is illustrated on this page.

# 2023 Risk Management Plan

Our work will continue to evolve in 2023 with a particular focus on strengthening cross-functional risk management in alignment with the 12-point plan.

This will include deep-dive sessions into specific risks with cross-functional teams. We will work with the new sustainability risk champion to further develop the risk register in this area. The Group Risk team will also continue to influence decision making through effective challenge to Risk Owners and Risk Champions in the quarterly review process.

# Our risk governance framework

At the very top of our structure is our Board with responsibility for oversight of risk management, setting our risk appetite and monitoring the application of our risk framework including strategy, execution, and outputs of risk reviews by the business and Group Risk team. The Board cascades our risk appetite throughout our organisation through the Executive Committee, risk owner community and our management Group. A formal 'bottom-up' risk management exercise ensures that risks are escalated back through the process to our Board and are reflected in our Principal Risks as appropriate.

Providing guidance and rigour across this process is our Executive Committee and the Group Risk team.

At the third line of defence is our Internal Audit function, providing an annual opinion on the effectiveness of our Risk Management process to the Executive Committee, chaired by the Chief Executive Officer, and then to the Board and its Committees.

![img-1.jpeg](img-1.jpeg)

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# 2022 Principal Risks

We assess our Principal Risks in terms of their potential impact on our ability to deliver our business strategy. The Principal Risks are presented in alphabetical order below. Sustainability risks are embedded and run through the Principal Risks as appropriate.

## Our Strategy for Growth

**1 Strengthen** the foundation to serve customers sustainably and simply

**2 Accelerate** profitable growth through prioritisation and customer focus

**3 Transform** our business through innovation and acquisition

![img-2.jpeg](img-2.jpeg)

For further information on our Strategy for Growth

Risk change from 2021 key

↑ Increased risk

↓ Reduced risk

↔ No change

## Business continuity and business change

Our business requires continuous improvement and depends on our ability to execute business change programmes such as the 12-point plan at pace, whilst continuing to operate business as usual. The pace and scope of our business change initiatives may increase execution risk for the change programmes as well as for our business-as-usual activities.

Our business depends on our ability to plan for and be resilient in the face of events that threaten one or more of our key locations. Damage caused by environmental and climate change factors, including natural disasters and severe weather, can and do threaten our critical sites. Widespread outbreaks of infectious diseases and the local and global actions and requirements to deal with them, such as the Covid pandemic, create uncertainty and challenges for the Group and our customers.

Oversight
Board

Change from 2021

Link to Strategy
1. Strengthen
3. Transform

![img-3.jpeg](img-3.jpeg)

### Examples of risks

- Multiple change initiatives, including those within our 12-point plan could distract management from delivering business as usual objectives.
- Widespread outbreaks of infectious diseases, including new Covid variants.
- Natural disaster causes disruption to manufacturing and/or distribution at single or sole source facility.
- Severe weather patterns, global temperature rise and sea-level rise caused by climate change or natural disaster causes damage to manufacturing or distribution facilities, impacting ability to meet customer demand.
- Disruption to the business due to critical system infrastructure and applications being unavailable.
- Failure to effectively implement core elements of business change prevents our projects and programmes achieving the intended benefits and disrupts existing business activities.
- Failure to transform to achieve our sustainability targets.

### Actions taken by management

- Dedicated Acceleration Office and Executive Steering Committee led by our CEO to monitor the successful delivery of the 12-point plan.
- Global, regional, and local crisis management governance in place.
- Emergency and incident management and business recovery plans in place at major facilities and for key products and key suppliers.
- IT disaster recovery policy in place.
- Project management governance and toolkits and project steering committee oversight to support successful execution of programme and projects.
- A new ESG Operating Committee implements and operationalises ESG strategy and provides data and metrics to monitor implementation.

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Risk report continued

2022 Principal Risks continued

## Commercial execution

The long-term success of our business depends on setting the right strategic priorities such as the 12-point plan and our three-year strategic plan and executing on our plans to deliver priority initiatives in highly competitive markets.

This requires effective communication and engagement both internally on a cross-functional basis (for example in order to drive procedure-based selling models) and with our customers, suppliers and other stakeholders. We must also successfully embed the right governance structures, accountability and capabilities across the Group and ensure we adjust and refine strategic priorities and business models when necessary. Failure to set and execute on priorities and drive cross functional accountability within our business will impact our ability to continue to grow our business profitably and sustainably and to serve our customers.

Oversight
Board

Change from 2021

↑

Link to Strategy

1. Strengthen
2. Accelerate
3. Transform

![img-4.jpeg](img-4.jpeg)

# Examples of risks

- Failure to execute our strategy adequately from high-level ambition to specific actions to make the ambition a reality.
- Inability to keep pace with significant product innovation and technical advances to develop commercially viable products.
- Failure to engage effectively with our key stakeholders to meet their evolving needs leading to loss of customers.
- Failure to manage distributors effectively leading to stocking and compliance issues.
- Inability to satisfy customers' sustainability requirements and expectations.
- Limited healthcare professional access to medical education.
- Failure to achieve potential from acquisitions due to integration challenges.

# Actions taken by management

- Strategic planning process clearly linked to business and Group risk.
- Continued new product launches and monitoring of innovation pipeline.
- An enhanced Sales Inventory and Operations (SI&OP) process to improve demand and supply planning.
- Enhanced accessible digital sales information and training modules for sales staff.
- Enhanced Virtual Medical Education platforms and opening of the Smith+Nephew Academy in Singapore.
- Integration committee to review/approve integration plans and monitor ongoing processes.

## Cybersecurity

We depend on a wide variety of information systems, programmes and technology to run our business effectively. We also develop and sell certain digitally enabled products that connect to proprietary and third-party networks and/or the internet.

Our systems and the systems of the entities we acquire may be vulnerable to a cyber-attack, theft of intellectual property, malicious intrusion, data privacy breaches or other significant disruption. We have a layered security approach in place to prevent, detect and respond, to minimise the risk and disruption of any intrusions and to monitor our systems on an ongoing basis for current or potential threats.

Oversight

Audit Committee

Change from 2021

↑

Link to Strategy

1. Strengthen
2. Transform

![img-5.jpeg](img-5.jpeg)

# Examples of risks

- Loss of confidential or sensitive information, intellectual property and/or data privacy breach.
- Inadequate consideration of cybersecurity in the design of new products, systems and/or processes.
- Disruption to business operations due to a significant cybersecurity incident.
- Increased government focus on cybersecurity and changes in regulatory environment.
- Increasing demand for cybersecurity expertise could impact our ability to attract and retain cybersecurity talent.

# Actions taken by management

- Ensured every user has access to and is using a secure Virtual Private Network (VPN) when connecting to Smith+Nephew networks to safeguard remote working.
- Continued security awareness activities including email communications, intranet posts, visuals, videos and more Covid-related email phishing training activities.
- Multi-factor authentication tools reduce the likelihood of remote attacks.
- Security information and event management (SIEM) in place to provide real-time analysis of security alerts generated by applications and network hardware.
- Regular penetration testing and frequent vulnerability scanning undertaken.
- Endpoint protection and intrusion detection/prevention implemented.
- Security governance structure in place including a Security & Privacy Steering Committee.
- Monitor developments from governments and raise changes and developments with Global IT Security.
- Cybersecurity Maturity Programme monitored by the Audit Committee.

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# Global supply chain

Our ability to make, distribute and sell medical products to customers in over 100 countries involves complex manufacturing and supply chain processes. Increased outsourcing, sophisticated materials, and the speed of technological change in an already complex manufacturing process leads to greater potential for disruption in our supply chain. Post-Covid lack of availability of raw materials and components and localised lockdowns such as in China compound supply and business disruption.

Capacity constraints and the regulatory environment, including the increased focus on global regulation of sustainability, increase our exposure to supply chain disturbance. Increasingly frequent climate events increase the likelihood and impact of disruptions to our supply chain.

Increased inflationary pressure on production, freight and warehousing and distribution costs increases our risk of failing to achieve accelerated profitable growth.

# Examples of risks

- Disruption to manufacturing at a single source facility (lack of manufacturing redundancy).
- Manufacturing and supply chain capacity not adequate to support growth.
- Risks associated with the transition of warehouse and distribution activities to external supplier impacting inbound and outbound logistics.
- Supplier failure impacts ability to meet customer demand (single source supplier).
- Inadequate sales and operational planning impacts ability to meet customer demand for product.
- Excess inventory due to incorrect demand forecasts, inaccurate demand signals and unexpected changes in demand.
- Failure of suppliers and distribution partners to achieve and maintain regulatory compliance.
- Increasing costs of raw materials and freight.
- Increasing salary and wage costs for manufacturing and distribution employees and contractors.
- Severe weather patterns caused by climate change causes damage to manufacturing or distribution facilities, impacting ability to meet customer demand.
- Disruption to the business due to critical system infrastructure and applications being unavailable.
- Critical material shortages leading to supply challenges.
- Increased freight cycle times, increasing in-network inventory while disrupting customer supply.
- Labour attrition and delays in backfilling.

# Actions taken by management

- Our 12-point plan includes initiatives to improve product availability and inventory, enhance procurement and management of transportation costs, focus on lean manufacturing and quality and optimise our manufacturing network.
- Delivering Global Operations transformation programme to optimise manufacturing and distribution centres and reduce single source limitations.
- Global Operations project management governance and toolkits to support successful execution of transformation programmes.
- Risk-based review programmes undertaken for critical suppliers.
- Business continuity plans developed and alternative source options identified for critical suppliers.
- Executive oversight of sales and operational planning.
- Increased co-ordination between commercial, supply chain and logistics to improve forecast accuracy.
- Comprehensive product quality processes in place from design to customer supply.
- Supplier contract agreements achieve and manage regulatory compliance.
- Initiatives to improve manufacturing efficiency and reduce overhead costs.
- IT disaster recovery policy in place.
- Leadership taskforce established to resolve cumulative impact of global supply chain events.

Oversight
Board

Change from 2021

Link to Strategy
1. Strengthen
2. Accelerate

![img-6.jpeg](img-6.jpeg)

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Risk report continued

2022 Principal Risks continued

## Legal and compliance

We are committed to doing business with integrity and believe that 'doing the right thing' is part of our mandate to operate. We operate in multiple countries and regulatory authorities in each jurisdiction enforce an increasingly complex pattern of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing, sale and operation of both traditional and digital healthcare products and services.

Operating across this complex and dynamic legal and compliance environment, which includes regulations on bribery, corruption, privacy, sustainability and trade compliance, increases the risk of fines, penalties, and reputational damage. We mitigate this through legal and compliance policies, procedures, training and practices designed to prevent and detect violations of law, regulations and industry codes.

Oversight

Compliance & Culture Committee
Change from 2021

Link to Strategy

1. Strengthen
2. Accelerate
3. Transform

![img-7.jpeg](img-7.jpeg)

Examples of risks

- Failure to act in an ethical manner consistent with our Code of Conduct and Business Principles.
- Violation of anti-corruption or healthcare laws, breach by employee or third-party representative.
- Misuse or loss of personal information of patients, employees, research subjects, consumers or customers results in violations of data privacy laws, including General Data Protection Regulations.
- The development, manufacture and sale of medical devices entail risk of product liability claims or recalls.
- Failure to identify changes in or new legal or regulatory requirements including sanctions programmes and ESG matters which result in non-compliance with applicable laws and regulations.
- Failure to meet needs of stakeholders relating to increased focus on and regulation of ESG reporting requirements.

Actions taken by management

- Board Compliance & Culture Committee oversees our ethical and compliance practices.
- Global compliance programme, policies and procedures.
- Annually all employees required to undertake training and certify compliance with our Code of Conduct and Business Principles.
- Group monitoring and auditing programmes in place.
- Launched enhanced confidential independent reporting channels for employees and third parties to report concerns.
- Trade compliance programme, policies and procedures.
- The ESG Operating Committee assesses new and enhanced regulations and reporting requirements and works cross-functionally to ensure compliance.
- Monitoring new regulatory and enforcement trends.

## Mergers and acquisitions

As the Group grows to meet the needs of our customers and patients, we recognise that we are not able to develop all the products and services required using internal resources and therefore need to undertake mergers and acquisitions in order to expand our offering and to complement our existing business. In other areas, we may divest businesses or products which are no longer core to our activities.

It is crucial for our long-term success that we make the right choices around acquisitions and divestments.

Failure to identify appropriate acquisition targets, to conduct adequate due diligence or to integrate them successfully or to deliver on the acquisition business case would have an adverse impact on our competitive position and profitability.

Oversight
Board

Change from 2021

Link to Strategy
3. Transform

![img-8.jpeg](img-8.jpeg)

Examples of risks

- Failure to identify appropriate acquisitions.
- Failure to conduct effective acquisition due diligence.
- Failure to integrate newly acquired businesses effectively, including integration with Group standards, policies and financial controls.
- Failure to deliver on plans to achieve the acquisition business case.

Actions taken by management

- Acquisition activity aligned with corporate strategy and prioritised towards products, franchises and markets identified to have the greatest long-term potential.
- Clearly defined investment appraisal process based on range of valuation metrics including return on invested capital, in accordance with Capital Allocation Framework and comprehensive post-acquisition review programme.
- Detailed and comprehensive cross-functional due diligence undertaken prior to acquisitions by experienced internal and external experts (including the integration team).
- Compliance and other risks included as part of due diligence reviews, integration plans and reporting for acquisitions.
- Integration committee review, approval of integration plans and monitoring of ongoing process.
- Board has annual post-deal review session.

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## New product innovation, design & development including intellectual property

Our product innovation pipeline is becoming broader in scope and increasingly complex, as we focus our efforts on procedure innovation using digital technologies such as connectivity, machine learning, and artificial intelligence. Our focus on high growth and profitable markets requires us to better understand unmet customer needs, drivers of surgical efficiency and patient outcomes, and new country/regional regulations including requirements related to cybersecurity and sustainability. Our innovation pipeline needs to be sufficiently differentiated from our competition in order for us to deliver our commercial ambition.

If Smith+Nephew fails to protect and enforce its intellectual property rights successfully, its competitive position could suffer, which could impact profitable, sustainable growth.

Oversight
Board

Link to Strategy
3. Transform

Change from 2021

![img-9.jpeg](img-9.jpeg)

### Examples of risks

- Failure to develop, partner or acquire a competitively differentiated innovation.
- Insufficient long-term planning to respond to competitor disruptive entries into marketplace.
- Inadequate innovation due to low Research & Development (R&D) investment, R&D skills gap or ineffective product development execution.
- Loss of market share due to critical gaps in product portfolio not filled.
- Loss of proprietary data due to natural disasters or failure of Product Lifecycle Management (PLM) systems.
- Competitors may assert patents or other intellectual property rights against the Group or fail to respect the Group's intellectual property rights.
- Failure to ensure sustainability in new products.

### Actions taken by management

- Our 12-point plan includes an initiative to reposition our knee and hip portfolio.
- Continued product and technology acquisitions and product launches and effective implementation of new product launches.
- Global R&D organisation and governance framework providing strategic direction for allocation of R&D investment across all businesses. Clear stage-gate process to continually evaluate R&D investment decisions and development of new products.
- Cross-functional New Product Design and R&D processes focused on identifying new products and potentially disruptive technologies and solutions.
- Replacing global PLM systems.
- Monitored external market trends and collated customer insights to develop product strategies.
- Careful attention to intellectual property considerations.
- Sustainability criteria built into new product development processes.

## Political and economic

We operate a global business and are exposed to the effects of political and economic risks, changes in the regulatory and competitive landscape, trade policies and trade compliance requirements, war, political upheaval, changes in government policy regarding healthcare priorities and sustainability expectations, increasing inflationary pressure and tax rates, preference for local suppliers, import quotas, economic sanctions and terrorist activities.

Oversight
Board

Link to Strategy
1. Strengthen
2. Accelerate

Change from 2021

![img-10.jpeg](img-10.jpeg)

### Examples of risks

- Global or regional recession and increasing macroeconomic controls due to Covid impact on customer financial strength.
- Global political and economic uncertainty and conflict.
- Failure to meet the sustainability targets and public policy changes.
- Failure to pivot on business strategy in light of increased sanction programmes globally.
- Market access rights.
- Increases in import and labour costs.
- Increases in tariffs and restrictions on global trade.
- Inflationary pressures impacting raw materials, freight, salaries and wages.

### Actions taken by management

- Built sustainability strategy on our purpose, business strategy, and culture pillars, and tracked and benchmarked targets within the industry.
- A new ESG Operating Committee implements and operationalises ESG strategy and provides data and metrics to monitor implementation.
- Continued engagement with governments, administrations, and regulatory bodies to enhance education and advocacy efforts with policymakers.
- Global trade compliance programme, policies and procedures.
- Actively participate in trade associations to enhance education and advocacy efforts with policymakers.
- Ongoing engagement and monitoring/lobbying on localisation initiatives.

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2022 Principal Risks continued

## Pricing and reimbursement

Our success depends on our ability to sell our products profitably, despite increasing inflation and costs associated with improving the sustainability of our products, pricing pressures from customers and the availability of and access to adequate government funding and reimbursement to meet increasing demands for our products arising from patient demographic trends. The prices we charge are therefore impacted by budgetary constraints and our ability to persuade customers and governments of the economic value of our products, based on clinical data, cost, patient outcomes and comparative effectiveness.

Market developments such as China volume-based procurement, consolidation of customers into buying groups, inflation, increasing professionalisation of procurement departments and the commoditisation of entire product groups, continue to challenge prices.

We mitigate this through price increases to mitigate the impact of inflation where possible, portfolio mix and promotion of differentiated products, including a compelling clinical and economic value proposition.

Oversight
Board

Link to Strategy
1. Strengthen
2. Accelerate

Change from 2021

↑

![img-11.jpeg](img-11.jpeg)

# Examples of risks

- Reduced reimbursement levels and increasing pricing pressures.
- Systemic challenge on number of elective procedures.
- Lack of compelling health economics data to support reimbursement requests.
- Unilateral price controls/reductions imposed on medical devices.
- Price-driven tendering/procurement processes.
- Volume-based procurement in China and other markets.
- Limited access to non-clinical decision makers.
- Limited ability to pass on increased costs such as raw materials, freight, sustainability improvements and the cost of compliance with regulations to our customers.

# Actions taken by management

- Our 12-point plan includes an initiative which focuses on pricing strategy and execution in order to mitigate some of the impact of inflation.
- Developed innovative economic product and service solutions for both established and emerging markets.
- Incorporated health economic components into the design and development of new products.
- Sales training to improve capability to communicate the clinical and economic value proposition to non-clinical decision makers.
- Implementing innovative contracting models designed to lessen the risk of adoption and coverage for healthcare providers and payers.
- Increased engagement with payer bodies to influence reimbursement mechanisms to reward innovation.
- Optimise portfolio mix and promote differentiated products.
- Consideration of price increases.

## Quality and regulatory

Global regulatory bodies continue to increase their expectations of manufacturers and distributors of medical devices not only in respect of quality and regulation of products but also in respect of sustainability requirements. Our products are used in the human body and therefore patient safety is of paramount importance. The European Medical Device Regulation (EU MDR), and multiple other global regulations and changes in standards have increased the focus on clinical and technical evidence, supplier controls and product performance transparency. Our customers and other stakeholders also require us to explain our approach to and demonstrate compliance with increasing sustainability regulations and reporting requirements.

Oversight
Compliance &
Culture Committee

Change from 2021

↓

Link to Strategy
1. Strengthen
2. Accelerate

![img-12.jpeg](img-12.jpeg)

# Examples of risks

- Transition to EU MDR impacts ability to meet customer demand.
- Increase in time required by Notified Bodies to review product submissions and site quality systems' certification time for new products impacts ability to meet customer demand.
- Defects in design or manufacturing of products supplied to, and sold by, the Group could lead to product recalls or product removal or result in loss of life or major injury.
- Significant non-compliance with policy, regulations or standards governing products and operations regarding registration, design, manufacturing, distribution, sales or marketing.
- Failure to obtain proper approvals for products or processes.
- More stringent local requirements for clinical data across various markets globally.
- Failure to meet stakeholder expectations with regard to increasing sustainability regulations and reporting requirements.

# Actions taken by management

- EU MDR Steering Group regularly monitors activities to comply with new requirements.
- Regular engagement with Notified Bodies, MHRA and regulatory representatives to monitor regulatory changes and understand interpretation of legislation.
- Comprehensive and documented product quality processes and controls from design to customer distribution in place, with the addition of cybersecurity to new product development projects for relevant products.
- Standardised monitoring and compliance with quality management practices through our Global Quality and Regulatory Affairs organisation.
- Incident management teams in place to provide a timely response in the event of an incident relating to patient safety.
- Governance framework in place for reporting, investigating and responding to instances of product safety and complaints.
- Local clinical evidence requirements are included in global new product development projects.

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## Talent management

In the current market, recruitment and retention of top talent and minimising attrition is a critical risk which requires a strong engagement process. We recognise that people leadership, effective succession planning and the ability to engage, retain and attract talent is a key lever of success for our business. Failure to do so places our ability to execute the Group strategy and to be effective in the chosen market/discipline at risk.

Oversight
Board

Change from 2021

Link to Strategy
1. Strengthen
2. Accelerate

![img-13.jpeg](img-13.jpeg)

# Examples of risks

- Loss of key talent, high attrition and lack of appropriate succession planning in context of required skillsets for future business needs.
- Loss of competitive advantage due to an inability to attract and retain top talent.
- Loss of intellectual capital due to poor retention of talent.
- Failure to attract talented and capable candidates.
- Increased talent movement globally due to shifting personal work-life balance priorities.
- Increased salaries globally, particularly in the Cybersecurity, ESG, Research & Development, Quality and Regulatory Affairs, Manufacturing and Distribution functions.

# Actions taken by management

- Talent planning and people development processes well established across the Group.
- Talent and succession planning discussed annually by the Board and regularly by the Executive Committee and Nomination & Governance Committee.
- Identification of high-value roles and ensuring that these roles are filled with our high-performance individuals with strong succession plans in place.
- Developed strategic skills resourcing plan by functional areas.
- Provided employees with access to tools and resources to manage their emotional, physical, and mental wellness.
- Enhanced Inclusion, Diversity and Equity (IDE) policy, including establishment of Employee Inclusion Groups (EIGs) and IDE Council in order to foster culture of belonging within the organisation and promote engagement, attraction and retention of top talent.
- Ongoing segmentation of specific job roles and applying focused rewards to ensure we are competitive and attractive to candidates.

## Taxation and foreign exchange

We operate a global business and are therefore required to comply with tax legislation in multiple jurisdictions and are also exposed to exchange rate volatility. Adverse changes to tax legislation, including those driven by international agreements such as the Organisation for Economic Co-operation and Development (OECD) global minimum tax rate, and volatility in foreign currency exchange rates can impact our results and it may not be possible to fully mitigate against them.

Oversight
Audit Committee

Change from 2021

Link to Strategy
1. Strengthen

![img-14.jpeg](img-14.jpeg)

# Examples of risks

- Potential for significant tax rate changes and/or base broadening measures in key jurisdictions where we operate including OECD proposals and US tax reform.
- Failure to comply with current tax laws.
- Transfer pricing policy not correctly implemented or monitored.
- Risk of adverse trading margins due to fluctuating foreign currency exchange rates between our main manufacturing operations (the US, UK, Costa Rica, Malaysia and China) and where our products are sold.
- Changing legislation in the US and other key markets may require changes to our operating model.

# Actions taken by management

- The Group Tax team continually monitor developments in tax legislation and obtain external advice where relevant.
- The Group Tax team, supported by external advisers, work closely with the business to implement agreed processes and procedures.
- A foreign exchange hedging programme is operated and is overseen centrally by the Group Treasury team.
- The Finance and Banking Committee monitors ongoing treasury and tax matters including foreign exchange exposure.
- Internal Audit and Audit Committee oversight.
- Seeking appropriate independent third-party advice when required.

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Risk report continued

# Our Viability Statement

## How we assess our prospects

During the year, the Board has carried out a robust assessment of the principal risks affecting the Company, particularly those which could threaten the business model. These risks, and the actions being taken to manage or mitigate them, are explained in detail on pages 71-77 of this Annual Report.

In reaching our Viability Statement conclusion, we have undertaken the following process:

- The Audit Committee reviewed the Risk Management process at their meetings in February, April, July and December, receiving presentations from the Group Risk team, explaining the processes followed by management in identifying and managing risk throughout the business.
- In August and November 2022, the Executive Committee met to review the 2022 Principal Risks (the top-down risk review process). The Executive Committee was asked to consider the significant risks which they believed could seriously impact the profitability and prospects of the Group and the principal risks that would threaten its business model, future performance, solvency or liquidity.
- All Executive Committee members nominated the Risk Champions and have worked with them to prepare risk registers. The Risk Champions nominated by the Executive Committee are senior employees and in risk management.
- Using the outputs from the Business Area 'bottom-up' risk identification completed in September 2022 and following 'top-down' discussions with the Executive Committee, the most significant risks affecting our organisation were presented to the Executive Committee for approval in November as the draft 2022 Principal Risks facing the Company and again in January 2023 as final disclosures.

- Executive Committee agreed to retain the 12 Principal Risks from 2021 with amendments to the descriptions within each Principal Risk to reflect the implementation of the 12-point plan and macro and internal factors to be taken into account in 2022.
- In assessing our TCFD risks we concluded that climate-related risks are not significant in our viability horizon of three years. Nonetheless, we have included an extreme weather event in our Business Continuity and Business Change scenario.
- All relevant executives have attested alignment to the Group's Enterprise Risk Management Process as part of the annual certification on governance, risk, and compliance.
- The Board debated and agreed the risk appetite for each of the Principal Risks in February 2022.
- Final Principal Risks were presented to the Audit Committee and the Board in February 2022 for their consideration and approval.
- Throughout the year, a number of reviews into different risks were conducted by the Board, the Audit Committee and the Compliance & Culture Committee looking into the nature of the risks and how they were mitigated.

## Assessment period

The Board have determined that the three-year period to December 2025 is an appropriate period over which to provide its Viability Statement.

This period is aligned to the Group's Strategic Planning process and reflects the Board's best estimate of the future viability of the business.

## Scenario testing

To test the viability of the Company, we have undertaken a robust scenario assessment of the Principal Risks, which could threaten the viability or existence of the Group.

These have been modelled as follows:

- In carrying out scenario modelling of the Principal Risks on the following page we have also evaluated the impact of a severe but plausible combination of these risks occurring over the three-year period. We have considered and discussed a report setting out the terms of our current financing arrangements and potential capacity for additional financing should this be required in the event of one of the scenarios modelled occurring.
- We are satisfied that we have robust mitigating actions in place as detailed on pages 71-77 of this Annual Report. We recognise, however, that the long-term viability of the Group could also be impacted by other, as yet unforeseen, risks or that the mitigating actions we have put in place could turn out to be less effective than intended.

## Viability Statement

Having assessed the Principal Risks, the Board has determined that we have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a period of three years from 1 January 2023. In our long-term planning we consider horizons of between five and 10 years. However, as most of our efforts are focused on the coming three years, we have chosen this period when considering our viability.

Our conclusion is based on the Strategic Plan reviewed by the Board in January 2023. We will continue to evaluate any additional risks which might impact the business model.

By order of the Board, on 21 February 2023.

**Helen Barraclough**
Company Secretary

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## 2022 Scenarios modelled

### Scenario 1: Global Economic Downturn

Significant global economic recession, leading to sustained lower healthcare spending across both public and private systems.

**Action taken:** We have modelled 10% lower revenue throughout 2023 and 5% lower revenue throughout 2024.

Reduced reimbursement levels and increasing pricing pressures.

**Action taken:** We have modelled annual price erosion of 1% impacting all product lines, along with a full drop through impact on profit in each of the periods 2023-2025.

#### Link to strategy

- Accelerate profitable growth through prioritisation and customer focus.

#### Link to Principal Risks

- Business continuity and business change.
- Global supply chain.
- Commercial execution.
- Political and economic.
- Pricing and reimbursement.

### Scenario 2: Operational risk

Inability to keep pace with significant product, innovation, and technical advances to develop commercially viable products, losing significant market share to the competition.

**Action taken:** We have modelled 1% lower growth than planned for a key product range in the US in 2023 and 2024.

Disruption to a Global Distribution Centre (GDC) preventing our ability to supply our customers with all products from the applicable GDC for one quarter.

**Action taken:** We have modelled an inability to supply products from one of our GDCs for one quarter of 2024.

Key Supplier Disruption - resulting in our inability to manufacture and supply a few key products for a full year.

**Action taken:** We have modelled an interruption to receiving goods from a key supplier for a period of one year in 2023.

Increases in raw materials, freight and labour costs.

**Action taken:** We have modelled an increase in our input costs by an additional 5% in 2023 and 2024, due to continued inflationary pressures.

Product Liability Claim.

**Action taken:** we have modelled a group of product liability claims resulting in a settlement agreement requiring cash payment in 2024 and 2025, without any insurance coverage.

#### Link to strategy

- Strengthen the foundation to serve customers sustainably and simply.
- Transform our business through innovation and acquisition.

#### Link to Principal Risks

- Commercial execution.
- New product innovation, design & development including intellectual property.
- Global supply chain.
- Business continuity and business change (weather-related disruption).
- Legal and compliance.
- Political and economic.
- Talent management.

### Scenario 3: Tax, foreign exchange, legal, regulatory and compliance risks

Data privacy failure - giving rise to a significant fine or loss.

**Action taken:** We have modelled a one-off significant fine from regulator of 2% of revenue or loss resulting from a data privacy issue in 2024.

Failure to obtain proper regulatory approvals for products or processes impacting our ability to sell products.

**Action taken:** We have modelled the complete loss of revenue from a key product effective in mid-2023 for two years, and returning to lower volumes in mid-2025.

Risk of adverse trading margins due to fluctuating foreign currency exchange rates across our markets.

**Action taken:** We have modelled a reduction in profitability in 2024 and 2025 due to a weakening in other currencies relative to the US Dollar by 5%.

#### Link to strategy

- Strengthen the foundation to serve customers sustainably and simply.

#### Link to Principal Risks

- Legal and compliance.
- Quality and regulatory.
- Taxation and foreign exchange.

### Scenario 4: Cybersecurity

Disruption to business operations due to a significant cybersecurity incident.

**Action taken:** We have modelled one of our key regions being unable to invoice also affecting shipping and tracking of deliveries for one month due to a disruption to our IT infrastructure in 2024.

#### Link to strategy

- Strengthen the foundation to serve customers sustainably and simply.

#### Link to Principal Risks

- Cybersecurity.

### Scenario 5: Mergers and acquisitions

Failure to integrate newly acquired business effectively to achieve expected growth.

**Action taken:** We have modelled a scenario of zero growth in a recently acquired business over 2023 and 2024.

#### Link to strategy

- Transform our business through innovation and acquisition.

#### Link to Principal Risks

- Mergers and acquisitions.

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Our stakeholders

# Section 172 statement

In accordance with section 172 of the Companies Act 2006 and the UK Corporate Governance Code 2018, the Board considers the potential impact on the Company's key stakeholders and takes their views and interests into account when making decisions. The Board also takes the opportunity to engage with our stakeholders, as appropriate. Pages 109-115, as well as the pages referenced below, form part of this statement and provide examples of how each of our key stakeholders have been considered and engaged.

How we engage with our main stakeholders

![img-0.jpeg](img-0.jpeg)

## Governments and regulators

We are subject to the laws and regulations of many governments and regulators across the world and we work to ensure product safety and legal compliance in order to achieve the full potential of our portfolio.

![img-1.jpeg](img-1.jpeg)

## Employees

Our employees are crucial to the success of our business and many of our decisions have an impact on them. We believe that an engaged workforce is better for business.

![img-2.jpeg](img-2.jpeg)

![img-3.jpeg](img-3.jpeg)

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![img-4.jpeg](img-4.jpeg)

# Environment and community

People, Planet and Products are at the heart of our sustainability strategy aiming to create a positive impact on our communities reducing the impact on our environment and enabling us to innovate sustainably.

Read more on pages 56-68 and in our 2022 Sustainability Report

![img-5.jpeg](img-5.jpeg)

![img-6.jpeg](img-6.jpeg)

# Investors

Our investors are the owners of our business and it is important for us to understand their perspectives on performance, value, risk and governance.

Read more on investors

www.smith-nephew.com

Our Investor presentations are available to download on our website

![img-7.jpeg](img-7.jpeg)

# Customers and suppliers

Our business model creates value through customer centricity whilst working in partnership with our suppliers ensures we have the right resources to support our growth.

![img-8.jpeg](img-8.jpeg)

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![img-9.jpeg](img-9.jpeg)

Our technology takes
the limits off living

# Getting a rugby
player back to
the game

Life Unlimited

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![img-10.jpeg](img-10.jpeg)

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# Governance

## Board leadership and purpose

| Letter from the Chair | 84 |
| --- | --- |
| Board of Directors | 86 |
| Executive Committee | 89 |

## Division of responsibilities

| Roles and composition of the Board | 90 |
| --- | --- |
| Corporate governance framework | 92 |
| Board activities | 94 |

## Composition, succession and evaluation

| Board effectiveness review | 96 |
| --- | --- |
| Board development | 97 |
| Nomination & Governance Committee report | 98 |

## Audit, Risk and Control

| Audit Committee report | 101 |
| --- | --- |
| Compliance & Culture Committee report | 108 |

| Engaging with stakeholders | 112 |
| --- | --- |

## Remuneration

| Directors' Remuneration report | 116 |
| --- | --- |

## Statement of Compliance

The Board is committed to the highest standards of corporate governance. We comply with the provisions and principles of the UK Corporate Governance Code 2018 (2018 Code). The Company's American Depositary Shares and bonds are listed on the New York Stock Exchange (NYSE) and we are therefore subject to the rules of the NYSE as well as to US securities laws and the rules of the Securities and Exchange Commission (SEC) applicable to foreign private issuers. We comply with the requirements of the NYSE and SEC and have no significant differences to report between the US and UK corporate governance standards.

We explain in this 'Governance' section how we comply with and have applied the 2018 Code during the year. The 2018 Code can be found at www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf. We also explain how we have complied with the Financial Conduct Authority's (FCA) Listing Rules and Disclosure & Transparency Rules (DTRs) throughout the year.

## Letter from the Chair

![img-11.jpeg](img-11.jpeg)

### Dear Shareholder

On behalf of the Board, I am pleased to present the governance section of our Annual Report, which sets out the Board's structure, roles, responsibilities, activities and stakeholder engagement during 2022.

## Supporting strategic and operational improvement

Despite intense macroeconomic and geopolitical headwinds, the Board has remained focused on strategy and value creation. Following Deepak's arrival in April 2022, urgent focus was required in order to set the Company on a trajectory to achieve its full potential and deliver value for shareholders.

The executive directors and management focused on core business strategy and value creation opportunities under the 12-point plan to fix orthopaedics, improve margin and accelerate growth in our Advanced Wound Manufacturing (AWM) and Sports businesses. In parallel, the Board maintained scrutiny over the implementation of the Strategy for Growth in line with the Board's risk appetite to ensure high standards of corporate governance were maintained and that decisions were considered in the interests of the Company's stakeholders and in the best interests of the Company as a whole.

From a governance perspective, the Board has continued to drive improvements in our enterprise risk management programme in order to positively impact the risk culture of the Company. The refreshed focus on our governance structure in order to provide further oversight on environmental, social and governance (ESG) matters has also been a focus for the Board this year.

## Board changes in 2022

Deepak joined us at an inflection point for the business and within his first 100 days conducted a deep dive review

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and assessment of the opportunities and challenges facing the Company and then presented his 12-point plan to the Board, supported by key KPIs and metrics to execute and deliver on the Company's significant potential for accelerated growth.

Jo Hallas was appointed as a Non-Executive Director to the Board on 1 February 2022 and was subsequently appointed as a member of the Audit Committee with effect from 1 September 2022. Jo's experience on sustainability matters has enhanced Board expertise in this area.

Robin Freestone, our Senior Independent Director took the decision to step down as a Non-Executive Director on 30 September having completed 7 years of service. We wish to thank him for his support to me as Chair, to the Board and the Company more broadly.

Marc Owen was appointed as Senior Independent Director with effect from Robin's departure and led the search for my successor. We also took the opportunity to strengthen the Nomination & Governance Committee, appointing Angie Risley with effect from 1 September 2022.

## Board and leadership succession planning

During my tenure we have strengthened the capabilities of the Board in terms of skills, composition and diversity and have appointed Board members with industry specific knowledge and broad geographical experience.

As succession planning is a key focus from both a leadership and governance perspective, we have developed a board composition and skills matrix which feeds into a formal rolling succession plan for directors. We have also worked with an independent third party to review our profile for the Company's Chief Executive Officer and continue to review internal talent pipeline development as part of executive succession planning.

## Chair search

The Nomination & Governance Committee and the Board were aligned on three core characteristics which would be required for a successful Chair: (i) a proven track record of delivering shareholder value; (ii) a strong background in governance, ideally within a UK FTSE environment; and (iii) the ability to support and develop the Chief Executive Officer, either through previous CEO experience or within a Chair role.

Marc engaged with various shareholders as part of the search process, who agreed with the characteristics determined by the Board and acknowledged that given the recent changes to Board and management, it was important to take the time to find the right fit for the new Chair.

After an extensive search, we announced on 17 February 2023 that subject to shareholder approval, Rupert Soames OBE will be appointed to the Board as a Non-Executive Director and Chair-designate at our AGM and will join the Nomination & Governance and Remuneration Committees upon appointment. In order to ensure a smooth transition to Rupert, I have agreed to remain as Chair until 15 September 2023 and will put myself forward for re-election at the AGM on this basis.

Rupert has extensive global leadership experience, a strong track record of delivering shareholder value and a deep understanding of the UK corporate governance environment. For more than eight years as Chief Executive Officer of Serco Group plc, Rupert led the transformation of the business and delivered significant improvements to profitability as he transitioned the Group's strategy from turnaround to growth. Rupert was a Non-Executive Director of DS Smith, the FTSE 100 packaging company until September 2022 and was also Senior Independent Director of Electrocomponents plc (now RS Group). He was a member of the Remuneration, Nomination and Audit Committees at both companies.

On behalf of the Board, I am delighted to welcome Rupert as my successor as Chair. I am confident that he is the right person to support the management team, the organisation and the Board through the next stage of Smith+Nephew's transformation.

## Stakeholders

Pages 111-115 provide further insight into how the Board engage with and consider the views of our stakeholders in our decision-making process, with one key example being the decision to invest in a new greenfield AWM site in Melton near Hull. The Board evaluated the benefit and impact on employees, customers, suppliers, investors, governments and regulators, the local communities and other stakeholders as part of decision making.

Following easing of restrictions post Covid, various Board members visited our Hull and Memphis sites in May and September 2022 respectively, which provided opportunities for Board members (especially those who had joined during or since the pandemic) to understand more about the core business strategy, value creation opportunities and challenges and the impact of key initiatives and projects on our stakeholders.

Human capital issues including culture and workforce transformation also continue to be important agenda items for the Board. This year the Board amplified its listening session programme, holding five sessions with employees from diverse regional and workforce stakeholder groups. The session with Employee Interest Group (EIG) leadership in particular provided strong insights for the Board in terms of employee-driven initiatives on Inclusion, Diversity and Equity (IDE). Further details can be found on pages 110-112.

## Annual General Meeting

Our 2023 AGM will be held at our Croxley offices on 26 April 2023 at 12pm. We strongly encourage shareholders to attend in person to listen to the proceedings, ask questions and vote. Further details of the AGM are included in the Notice of Meeting.

My thanks go to the Board for their commitment, contribution and dedication during 2022. I would also like to thank all of our shareholders for their continued patience during a challenging year for the Company.

It has been an honour to serve as your Chair and I will follow the Company with interest as management and the Board continue to partner together to execute on strategy and create and deliver further value for shareholders. 2023 looks set to be a year in which the resilience of Boards, CEOs and executives will continue to be tested and I believe that the current Board with the new Chair in place will be well positioned to provide support and oversight in a fast-changing environment.

**Roberto Quarta**
Chair

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Board leadership and purpose

# Board of Directors

## Roberto Quarta

### Chair

Appointed as an Independent Non-Executive Director in December 2013 and appointed Chair at the 2014 Annual General Meeting

N R

#### Key skills and competencies:

Roberto's career in private equity brings valuable experience to Smith+Nephew, 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 chair of a number of UK and international companies.

#### Current external appointments:

- Chair of WPP plc.
- Partner at Clayton Dubilier & Rice, LLC and Chair of CD&R Europe.
- Independent Non-Executive Director of Gulf Capital.

#### Previous experience:

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 S.p.A., Rexel SA, IMI plc and SPIE SA. Roberto was a former member of the Investment Committee of Fondo Strategico Italiano S.p.A.

#### Nationality:

American/Italian

## Deepak Nath

### Chief Executive Officer

Appointed Chief Executive Officer in April 2022

#### Key skills and competencies:

Deepak brings global leadership and risk-management expertise and has a track record of driving growth at major healthcare companies through delivering a significant improvement in execution and building a strong results-focused culture.

#### Current external appointments:

None.

#### Previous experience:

He began his career as a scientist in computational physics at Lawrence Livermore National Laboratory and holds a BSc and MSc in Mechanical Engineering and a PhD in Theoretical Mechanics from the University of California, Berkeley. Prior to joining Siemens Healthineers, he held roles at both Amgen and McKinsey and spent 10 years at Abbott Laboratories, Inc. culminating in his appointment as President of Abbott Vascular. At Siemens Healthineers (2018-2022) he was President of the Diagnostics business responsible for $6 billion of revenue and 15,000 employees.

#### Nationality:

American

#### Committee key

Member of the Audit Committee
Member of the Nomination & Governance Committee

#### Committee Chair

Member of the Remuneration Committee
Member of the Compliance & Culture Committee

C

R

C

## Rupert Soames

### Chair Designate

To be appointed as Non-Executive Director on 26 April 2023 subject to shareholder approval. Member of the Nomination & Governance and Remuneration Committees upon appointment and will succeed Roberto Quarta as Chair in September 2023

#### Key skills and competencies:

Rupert has extensive global leadership experience, a proven track record of delivering shareholder value and a deep understanding of UK corporate governance. For more than eight years as Chief Executive Officer of Serco Group plc, Rupert led the transformation and delivered significant improvements to profitability transitioning the group's strategy from turnaround to growth.

#### Current external appointments:

- Advisor to Serco Group plc, will retire in September 2023.

#### Previous experience:

Rupert stepped down in December 2022 as Group Chief Executive from Serco Group plc, the specialist services business in Health, Defence, Transport and Immigration, employing c.53,000 people and operating in 16 countries. He joined

![img-12.jpeg](img-12.jpeg)

Serco Group plc from Aggreko plc where he was Chief Executive Officer for 11 years and prior to that he was at software company Misys plc as Chief Executive of its Banking and Securities Division. He spent the first 16 years of his career at GEC plc. He studied Politics, Philosophy & Economics at Oxford University and was President of the Oxford Union. Rupert was a Non-Executive Director of DS-Smith the FTSE 100 packaging company until September 2022 and was previously Senior Independent Director of Electrocomponents plc (now RS Group). He was a member of the Audit, Remuneration and Nomination Committees for both companies. Rupert is a Visiting Fellow at Oxford University, and a Visiting Professor of Aston University.

#### Nationality:

British

## Anne-Françoise Nesmes

### Chief Financial Officer

Appointed Chief Financial Officer in July 2020

#### Key skills and competencies:

Anne-Françoise has worked as a senior finance executive in global FTSE listed companies for many years, which alongside a strong business acumen and deep sector knowledge provides her with the experience required to be part of the Smith+Nephew leadership team. She demonstrates a high competency for delivering operational excellence across different geographic markets and leading large teams who are responsible for significant budgets. She has an impressive background and her ability to translate financial insights into results helps guide Smith+Nephew.

#### Current external appointments:

- NED and Chair of the Audit Committee at Compass Group plc.

#### Previous experience:

Anne-Françoise joined GlaxoSmithKline plc in 1997 where she worked for 16 years, holding multiple senior roles including Senior Vice President, Global Vaccines. Anne-Françoise served as Chief Financial Officer for Dechra Pharmaceuticals plc in 2013 where she successfully implemented financial strategies to support the growth of the business. She was Chief Financial Officer of Merlin Entertainments Limited (formerly Merlin Entertainments plc from 2016 to 2020.

#### Nationality:

British/French

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## Marc Owen

### Senior Independent Director

Appointed Independent Non-Executive Director in October 2017 and Senior Independent Director in September 2022

A C N

#### Key skills and competencies:

Marc is a proven leader with an astute strategic vision, capable of building significant international healthcare businesses. He has strong commercial healthcare expertise.

**Current external appointments:**
None.

#### Previous experience:

Marc commenced his healthcare and technology career at McKinsey & Company where he progressed to senior partner and eventually a founding partner of McKinsey's Business Technology Office. In 2001, Marc joined McKesson Corporation and served as Executive Vice President and member of their Executive Committee. He delivered strategic objectives and led over 40 acquisitions and divestments over a 10-year period.

In late 2011, he headed McKesson Specialty Health, which operates over 130 cancer centres across the US and provides market intelligence, supply chain services, patient access to therapy, provider and patient engagement and clinical trial support. In 2014, he was appointed Chair of the European Management Board at Celesio AG. He retired in March 2017 once he had improved operations, set the strategy and recruited his successor.

#### Nationality:

British/American

## Erik Engstrom

### Independent

#### Non-Executive Director

Appointed Independent Non-Executive Director in January 2015

A N

#### Key skills and competencies:

Erik has successfully reshaped RELX Group'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. His experience as a Chief Executive Officer of a global company gives him valuable insights as a member of our Audit and Nomination & Governance Committees.

**Current external appointments:**

- Chief Executive Officer of RELX Group.

#### Previous experience:

Erik commenced his career at McKinsey & Company and then worked in publishing, latterly as President and Chief Operating Officer of Random House Inc. and as President and Chief Executive Officer of Bantam Doubleday Dell, North America. In 2001, he moved on to be a partner at General Atlantic Partners, a private equity investment firm. Between 2004 and 2009, he was Chief Executive Officer of Elsevier, the division specialising in scientific and medical information and then from 2009 Chief Executive Officer of RELX Group, the division specialising in scientific and medical information and then from 2009 Chief Executive Officer of RELX Group.

#### Nationality:

Swedish

## Jo Hallas

### Independent

#### Non-Executive Director

Appointed Independent Non-Executive Director in February 2022

A

#### Key skills and competencies:

Jo has extensive international experience focused on business transformation through both organic and acquisitive growth in global industrial and consumer sectors. She brings valuable expertise which will help Smith+Nephew build upon and achieve our strategic ambitions.

**Current external appointments:**

- Chief Executive Officer of Tyman plc.

![img-13.jpeg](img-13.jpeg)

#### Previous experience:

Jo commenced her career at Procter & Gamble based in Germany, the US, Thailand and the Netherlands. She then joined Bosch where she held a business unit leadership role in their Power Tools division followed by Invensys in 2009 where she ran their global heating controls business unit including launching its first smart home offer. She then moved to Spectris plc, where she had responsibility for a portfolio of global industrial technology businesses, as well as for the Group's digital strategy. Since 2019, Jo has served as Chief Executive Officer for Tyman plc where she has made sustainability a core foundation of the group's strategy. Jo was also previously Chair of the Remuneration Committee for Norcross plc.

#### Nationality:

British

## John Ma

### Independent

#### Non-Executive Director

Appointed Independent Non-Executive Director in February 2021

C

#### Key skills and competencies:

John has an impressive track record in medical device businesses and his contribution provides value as Smith+Nephew continues to develop innovative ways to grow and serve our markets with a focus towards Asia Pacific regions. He is an established healthcare leader and has strong experience of driving market entry and growth within emerging markets.

**Current external appointments:**

- Founder, Chair and Chief Executive of Ronovo Surgical.

#### Previous experience:

In 2000, John joined GE Healthcare and became Vice President and General Manager of their Global Product Company in China. John has also held a number of senior positions as President of Asia Pacific regions at Pentair Inc., Vice President of Express Scripts Inc., and Global Partner of Fosun Group.

![img-14.jpeg](img-14.jpeg)

He initially joined Fosun Pharma to lead their medical device business and in 2014 became President of Fosun Healthcare Holdings. He served as a key member of their healthcare investment committee which went on to establish a global presence across the US, Europe, Israel and China. In 2017, John joined Intuitive Surgical as their Senior Vice President of Strategic Growth Initiatives. He has previously served as a NED for both Haier Electronics Group and Clinical Innovations LLC.

#### Nationality:

American

Smith+Nephew Annual Report 2022

87

## Board leadership and purpose continued

### Board of Directors continued

#### Katarzyna Mazur-Hofsaess

##### Independent

##### Non-Executive Director

Appointed Independent Non-Executive Director in November 2020

![img-15.jpeg](img-15.jpeg)

C

##### Key skills and competencies:

Katarzyna demonstrates a true passion for customer focus and maintains an impressive track record in senior leadership within the MedTech industry. She is a qualified medical doctor (PhD), has an Executive MBA from the University of Minnesota and has a wealth of experience in medical devices and orthopaedic sectors. Her Chief Executive Officer experience of a global company and valuable industry knowledge will help drive innovation and ensure the continued development of Smith+Nephew.

##### Current external appointments:

- Chief Executive Officer, EMEA, at Fresenius Medical Care AG & Co. KgaA.

##### Previous experience:

Katarzyna commenced her corporate career in 1998 at Roche in Poland, prior to becoming General Manager for Poland of Allergy Therapeutics plc. In 2001, Katarzyna joined Abbott Laboratories initially to manage their diabetes care division in Poland and became country General Manager. Over the next nine years, her career at Abbott progressed becoming Divisional Vice President Abbott Diagnostics for Europe. In 2010, she became President of EMEA at Zimmer and then led the operations of Zimmer Biomet in EMEA. In 2018, Katarzyna became Chief Executive Officer for the €2.7 billion EMEA renal care business of Fresenius Medical Care, and in January 2022 took over responsibility for the Care Enablement organisation.

##### Nationality:

German/Polish

#### Rick Medlock

##### Independent

##### Non-Executive Director

Appointed Independent Non-Executive Director in April 2020

![img-16.jpeg](img-16.jpeg)

A

##### Key skills and competencies:

Rick has extensive experience and a deep understanding of technology focused R&D businesses. He has driven value and transformation throughout his executive career which will further reinforce the ability of Smith+Nephew to grow and develop into new and existing markets. Rick brings significant financial and risk management expertise as a well-regarded former FTSE 100 Chief Financial Officer, NED and Audit Committee Chair.

##### Current external appointments:

- NED and member of the Audit, Risk and Compliance Committee at Datatec Ltd.
- NED and Chair of the Audit Committee at Deliveroo.

##### Previous experience:

Rick has had a highly successful career as a strong commercial Chief Financial Officer in the technology industry, working for a range of international FTSE 100 and NASDAQ listed businesses during periods of high growth. He has held a number of Chief Financial Officer positions throughout his career, including at NDS Group plc, Inmanat plc and Worldpay Group plc. Rick brings a wealth of experience as a former NED and Audit Committee Chair of several technology driven businesses, such as Sophos Group plc, Edwards Vacuum, and Thus plc. Rick was also previously Chair of BluJay Solutions Ltd, Chair of Momondo Group and Chair of the Audit Committee for LoveFilm UK Limited.

##### Nationality:

British

#### Angie Risley

##### Independent

##### Non-Executive Director

Appointed Independent Non-Executive Director in September 2017

![img-17.jpeg](img-17.jpeg)

C R N

##### Key skills and competencies:

Angie has gained experience in a wide range of sectors, including a regulated environment. This diversity of experience is welcomed by the Board and the Remuneration Committee. Angie is also an additional resource and sounding board for Smith+Nephew's own internal Human Resources function.

##### Current external appointments:

- J Sainsbury plc Group HRD and member of their Operating Board.

##### Previous experience:

Between 2007-2013 Angie was the Group HR Director for Lloyds Banking Group, joining J Sainsbury plc as Group HR Director and a member of their Operating Board in January 2013. Over the years, Angie has been a member of the Low Pay Commission and has held a number of Non-Executive Directorships with Biffa plc, Arriva and Serco Group plc, and now Smith+Nephew. At Serco Group plc she was the Chair of the Remuneration Committee. Previously she has attended Remuneration Committees of Whitbread plc, Lloyds Bank.

##### Nationality:

British

#### Bob White

##### Independent

##### Non-Executive Director

Appointed Independent Non-Executive Director on 1 May 2020

![img-18.jpeg](img-18.jpeg)

C R

##### Key skills and competencies:

Bob is an experienced leader with more than 25 years' worth of industry relevant experience. He is an influential and well-known figure in the medical technology sector and has an impressive track record in delivering growth and fostering innovation. He brings valuable global medical technology insight to the Board, which will prove fundamental in helping to shape and develop the future strategic direction of Smith+Nephew healthcare expertise.

##### Current external appointments:

- Executive Vice President and President, Medical Surgical Portfolio at Medtronic plc.

##### Previous experience:

Bob has held a number of senior Vice President positions throughout his career, including at Chemdex Corporation, Accelrys Inc., SourceOne Healthcare Technologies, Inc., GE Healthcare and Covidien as President for Emerging Markets and President for Respiratory and Monitoring Solutions. He then became Senior Vice President and President of Medtronic Asia Pacific, having led the integration of Covidien Asia Pacific when it was acquired by Medtronic plc in 2015.

##### Nationality:

American

#### Helen Barraclough
Group General Counsel and Company Secretary
Appointed Company Secretary in April 2022

##### Key skills and competencies:

Helen is a qualified Solicitor admitted in England & Wales and a Chartered Governance Professional. She also serves as the Chief Risk Officer for Smith+Nephew.

##### Previous experience:

Helen started her career with Allen & Overy LLP and prior to joining Smith+Nephew held senior legal roles at WPP plc and Nomura International p.c.

88

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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

# Executive Committee

The Executive Committee of Smith+Nephew is responsible for leading the Company and executing on its strategy.

![img-0.jpeg](img-0.jpeg)

Myra Eskes

President APAC Region & Global Service

Prior to joining Smith+Nephew, Myra was President and Chief Executive Officer of GE Healthcare Southeast Asia, Korea, Australia and New Zealand and led the GE Life Sciences business for the Eastern & African growth markets.

Nationality: Dutch
Location: Singapore

![img-1.jpeg](img-1.jpeg)

Vasant Padmanabhan

President Research & Development

Vasant has over 25 years of global med-tech leadership experience. Prior to Smith+Nephew, Vasant held senior roles at Thoratec Corporation and Medtronic plc as Vice President of Connected Care R&D and Operations and Vice President of Product Development for the Implantable Defibrillator Business.

Nationality: American
Location: Andover, US

Smith+Nephew Annual Report 2022

![img-2.jpeg](img-2.jpeg)

Brad Cannon

President Orthopaedics, Sports Medicine & ENT and Americas

Brad brings more than 25 years of experience across medical devices and medtech. Prior to Smith+Nephew, Brad worked in Medtronic plc's Spine and Biologics division and previously served as Chief Marketing Officer and President of Europe and Canada at Smith+Nephew.

Nationality: American
Location: Andover, US

![img-3.jpeg](img-3.jpeg)

Simon Fraser

President Advanced Wound Management and Global Commercial Operations

Simon brings more than 30 years of experience across the sector. Prior to joining Smith+Nephew, Simon held senior roles at Dentsply Sirona, Abbott Laboratories, Alere Inc and Johnson & Johnson. Simon will retire in April 2023.

Nationality: American/Canadian
Location: Fort Worth, US

![img-4.jpeg](img-4.jpeg)

Alison Parkes

Chief Compliance Officer

Prior to moving into her current role, Alison served as the Compliance Officer for the Global Advanced Wound Management business, APAC and Emerging Markets and established and led the Global Compliance Programme Effectiveness & Improvement team.

Nationality: British
Location: Fort Worth, US

![img-5.jpeg](img-5.jpeg)

Paul Connolly

President Global Operations

Paul brings more than 30 years of global manufacturing and supply chain experience at multinational companies with a strong track record in delivering operational excellence and transformation programmes. Prior to joining Smith+Nephew, Paul held senior roles at Goodyear, DePuy, Inc., and other Johnson & Johnson family companies.

Nationality: American/Irish
Location: Andover, US

![img-6.jpeg](img-6.jpeg)

Mizanu Kebede

Chief Quality & Regulatory Affairs Officer

Mizanu brings more than 20 years of leadership experience in Quality and Regulatory Affairs. Prior to Smith+Nephew, Mizanu held senior roles at Avanos Medical, Life Technologies Corporation, Johnson & Johnson and STERIS Corporation.

Nationality: American
Location: Georgia, US

![img-7.jpeg](img-7.jpeg)

Helen Barraclough

Group General Counsel and Company Secretary

Prior to joining Smith+Nephew, Helen started her career at Allen & Overy LLP and held senior roles at WPP plc and Nomura International plc. She also serves as the Chief Risk Officer for Smith+Nephew.

Nationality: British
Location: Watford, UK

![img-8.jpeg](img-8.jpeg)

Phil Cowdy

Chief Corporate Development & Corporate Affairs Officer

Prior to joining Smith+Nephew, Phil served as a senior Director at Deutsche Bank AG for 13 years specialising in corporate finance and equity capital markets. He qualified as a chartered accountant with EY. Phil serves as the representative of Smith+Nephew on the Board of Bioventus Inc.

Nationality: British
Location: Watford, UK

![img-9.jpeg](img-9.jpeg)

Elga Lohler

Chief HR Officer

Prior to joining Smith+Nephew, Elga held Human Resources roles at Transnet SOC Ltd, Sensormatic (now Tyco International plc) and Advanced Tissue Sciences, Inc. (acquired by Smith+Nephew in 2002).

Nationality: American/South African
Location: Fort Worth, US

Executive Officers whose tenure ceased

Peter Coenen, President EMEA Region, served until 31 December 2022.

89

Division of responsibilities

# Roles and composition of the Board

Chair

Roberto Quarta

- Responsible for the effective leadership and operation of the Board and for facilitating the review of its composition, effectiveness and development.
- Promotes effective board relationships, encouraging constructive challenge and facilitating effective communication between Board members and supporting a culture of openness, challenge and debate.
- Ensures that the Board understand the views and needs of the Company's stakeholders and facilitates effective communication and dialogue, whilst maintaining an appropriate balance between stakeholders.
- Leads relations with shareholders in order to understand their views on governance and performance against strategy.
- Responsible for promoting high standards of governance by the Board and its Committees.

The Chair achieves this through effective chairing of Board meetings; setting a board agenda which focuses on strategy, performance, value creation, risk management, culture, stakeholders and accountability; enabling an annual review of Board effectiveness; holding discussions with Board members both inside and outside the boardroom and ensuring appropriate Board induction and development programmes are in place.

Senior Independent Director

Marc Owen

- Acts as a sounding board for the Chair and as an intermediary for other Directors and stakeholders as necessary.
- As a member of the Nomination & Governance Committee, leads the Board evaluation process and search for Chair and Independent Non-Executive Directors to ensure effective succession.
- Acts as an alternative contact for stakeholders to raise concerns (in addition to Chair and senior management).

Independent Non-Executive Directors

Erik Engstrom, Jo Hallas, John Ma, Katarzyna Mazur-Hofsaess, Rick Medlock, Angie Risley and Bob White

- Comprise more than half of Board membership in order to meet the independence criteria set out in the 2018 Code.
- Ensure that no individual/small group can dominate the Board's decision making.
- Provide constructive challenge, give strategic guidance, offer specialist advice and hold executive management to account.

Chief Executive Officer

Deepak Nath

- Responsible for delivering and implementing Group strategy and management of the organisation as a whole. Provides information and participates in Board discussions regarding Group management and operational matters.
- Leads the Executive Committee and ensures its effectiveness in managing the overall operations and resources of the Group.
- Sets tone at the top with regard to culture, compliance and sustainability matters.
- Ensures the Chair and Board are updated regularly regarding key matters and maintains relationships with shareholders, advising the Board accordingly.

Chief Financial Officer

Anne-Françoise Nesmes

- Supports the Chief Executive Officer in developing and implementing Group strategy.
- Responsible for ensuring effective financial reporting, investor relations, tax, treasury and financial controls are in place within the Group.
- Provides information and participates in Board discussions regarding financial matters.
- Leads global finance function, developing key finance talent and succession planning.

Company Secretary

Helen Barraclough

- Supports the Chair and ensures Board members have access to the information required to perform their duties.
- Advises the Board on legal and corporate governance matters and supports the Board in applying the 2018 Code and complying with UK listing obligations, and other statutory and regulatory requirements.
- Provides a channel for Board and Committee communications and a link between the Board and management.

Non-Financial Reporting Regulations

In accordance with the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 information can be found on the following pages of this 2022 Annual Report relating to the environment: (pages 48-68 of this report and the 2022 Sustainability Report), social (pages 48-53 of this report and the 2022 Sustainability Report), anti-corruption and anti-bribery matters (page 53), employees (pages 48-53) and human rights (page 53).

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STRATEGIC REPORT^{}[] GOVERNANCE^{}[] ^{}[] ACCOUNTS^{}[] ^{}[] OTHER INFORMATION

In advance of the Board and Committee meetings, the Chair met with the Non-Executive Directors in the absence of Executive Directors. In addition, the Chair held one-to-one discussions with each Board Member throughout the year.

## 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 receive 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. The Board considers all external directorships prior to appointment, reviewing any potential conflict of interests and time commitment for both Executive Directors and Non-Executive Directors.

## 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 21 February 2023.

Each Director has a duty under the Companies Act 2006 to avoid a situation in which they 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 must, and do, 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 of Conflicts 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, the situations that could potentially give rise to a conflict of interest have been identified and duly authorised by the Board and are reviewed at least on an annual basis.

Bob White is President of the Medtronic Medical Surgical Portfolio at Medtronic plc, a situation which the Board has identified and duly authorised as potentially giving rise to a conflict of interest. Mr White is recused from any matters discussed at a meeting of the Board or of a Board Committee which the Board or relevant committee consider may pose a potential conflict.

## Outside directorships

We encourage our Executive Directors to serve as Non-Executive Directors of external companies. We believe that the work they do as Non-Executive Directors of other companies has benefits for their executive roles with the Company, giving them a fresh insight into the role of a Non-Executive Director.

Anne-Françoise Nesmes is a Non-Executive Director of Compass Group plc which is listed on the London Stock Exchange.

## Re-appointment of Directors

In accordance with the 2018 Code, all Directors offer themselves to shareholders for re-election annually, except those who are retiring immediately after the Annual General Meeting. Each Director may be removed at any time by the Board or the shareholders.

## Board support

Together with the Chief Executive Officer and the Group General Counsel and Company Secretary, the Chair ensures that the Board is kept properly informed. Each Director has access to the Group General Counsel and Company Secretary, who helps to ensure that Board procedures and good corporate governance practices are followed. Directors are permitted to take independent professional advice at the Company's expense if required in order to enable them to fulfil their duties.

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.

## Purchase of ordinary shares

In December 2021, we announced an updated capital allocation policy to prioritise the use of cash. The 2022 share buyback programme commenced on 23 February 2022 and $150 million was completed by 12 August 2022. As macroeconomic conditions continued to be uncertain, including higher input cost inflation, the Board decided it was prudent to delay further buybacks until conditions improved. We remain committed to returning surplus cash to shareholders over time.

Smith+Nephew Annual Report 2022

91

Division of responsibilities continued

# Corporate governance framework

## Our Board

The Board is accountable to shareholders for the performance and long-term sustainable success of the Company. It approves the strategy of the Group, evaluates and monitors the management of risk, and oversees the implementation of the strategy in order to achieve sustainable growth. The Board delegates certain matters to the Audit, Remuneration, Nomination & Governance and Compliance & Culture committees which support the Board in carrying out its responsibilities. Full details of the Matters Reserved to the Board can be found on the Company's website.

www.smith-nephew.com

### Audit Committee

Ensures the integrity of the Company's financial reporting, systems and controls.
Oversight of risk management process.
Reviews and monitors climate change disclosures and related ESG financial reporting obligations.
Ensures effectiveness of internal and external audit functions.

### Remuneration Committee

Determines Remuneration Policy and packages for Executive Directors and senior management, having regard to pay across our workforce.
Ensures reward strategy aligns with our purpose, values and long-term strategy.

### Nomination & Governance Committee

Reviews size, skills, experience, knowledge and composition of the Board, succession planning, diversity and governance matters.

### Compliance & Culture Committee

Reviews and monitors and has oversight of ethics and compliance, quality and regulatory, culture, sustainability matters and metrics, stakeholder relationships and related legal matters across the Group.

### Finance & Banking Committee

A Committee comprising senior executives which approves banking and treasury matters, guarantees and Group structure changes relating to mergers, acquisitions and disposals.

### Disclosures Committee

A Committee comprising senior executives which oversees and approves public announcements and communications to investors and Stock Exchanges. Reviews communications and reporting requirements in respect of market sensitive information.

## Executive Committee

The Board delegates the day-to-day operational management and implementation of Group strategy to the Chief Executive Officer and Executive Committee (see page 89). The Executive Committee recommends, and following Board approval, implements strategy, budget and three-year strategic plan within the Group. It ensures cross-functional alignment in order to deliver on strategy and reviews major investments, divestments and capital expenditure proposals. The Executive Committee also focuses on people and organisational culture, reviewing recruitment, attrition and development initiatives within the Company and developing and monitoring succession planning and talent pipeline below Board level.

The Executive Committee meets at least 10 times per year to review commercial and operating results against budget, key initiatives, KPIs and performance metrics aligned to deliver Group strategy.

The Executive Committee forms subcommittees including those listed below:

| Group Ethics & Compliance Committee | ESG Operating Committee | Mergers & Acquisitions Investment Committee | Global Benefits Committee | Health, Safety & Environment Committee |
| --- | --- | --- | --- | --- |
| Quarterly Business Review and Franchise/ Function/Regional Leadership Team Meetings | Global Crisis Management Team | New Product Development Committee | Inclusion, Diversity and Equity Council | Security and Privacy Steering Committee |

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 **GOVERNANCE**  
 ACCOUNTS  
 OTHER INFORMATION

## Board and Committee attendance

| Total meetings | Appointed | Board | Audit | Remuneration | Nomination & Governance | Compliance & Culture |
| --- | --- | --- | --- | --- | --- | --- |
|  |  | 7 | 8 | 8 | 6 | 4 |
| Roberto Quarta 1 | December 2013 | 7/7 | - | 7/8 | 5/6 | - |
| Roland Diggelmann 2 | March 2018 | 1/1 | - | - | - | - |
| Deepak Nath 3 | April 2022 | 6/6 | - | - | - | - |
| Erik Engstrom | January 2015 | 7/7 | 8/8 | - | 6/6 | - |
| Robin Freestone 4 | September 2015 | 5/5 | 6/6 | 7/7 | 5/5 | - |
| John Ma 5 | February 2021 | 6/7 | - | - | - | 4/4 |
| Katarzyna Mazur-Hofsaess | November 2020 | 7/7 | - | - | - | 4/4 |
| Rick Medlock | April 2020 | 7/7 | 8/8 | - | - | - |
| Anne-Françoise Nesmes | July 2020 | 7/7 | - | - | - | - |
| Marc Owen 6 | October 2017 | 7/7 | 8/8 | - | 6/6 | 4/4 |
| Angie Risley 7 | September 2017 | 7/7 | - | 8/8 | 2/2 | 4/4 |
| Bob White | May 2020 | 7/7 | - | 8/8 | - | 4/4 |
| Jo Hallas 8 | February 2022 | 7/7 | 3/3 | - | - | - |

1 Due to unforeseen travel disruption, Roberto Quarta was prevented from attending the July 2022 Remuneration and Nominations & Governance Committee meetings.

2 Roland Diggelmann stepped down as Chief Executive Officer and Executive Director with effect from 31 March 2022.

3 Deepak Nath has been appointed as the Company's new Chief Executive Officer (CEO) with effect from 01 April 2022.

4 Robin Freestone stepped down as Senior Independent Director and as a Non-Executive Director with effect from 30 September 2022.

5 Due to prior commitments, John Ma was not in attendance at the 27 April Board meeting however, he gave his comments to the Chair before the meeting.

6 Marc Owen has been appointed as Senior Independent Director with effect from 30 September 2022.

7 Angie Risley joined the Nominations & Governance Committee on 1 September 2022.

8 Jo Hallas joined the Audit Committee on 1 September 2022.

![img-10.jpeg](img-10.jpeg)

Smith+Nephew Annual Report 2022

93

Division of responsibilities continued

# Board activities

The following pages provide an overview of the key topics reviewed, monitored, considered and debated by the Board in the year to 31 December 2022.

## Group Purpose and Culture

![img-11.jpeg](img-11.jpeg)

## Strategy and transformation

![img-12.jpeg](img-12.jpeg)

- 48 Employees
- 108 Compliance & Culture Committee report
- Reviewing and monitoring Group strategy in alignment to the Purpose of Life Unlimited and culture pillars of Care, Collaboration and Courage.
- Monitoring and ensuring the scope and focus of strategic projects and initiatives support the Group's purpose and culture pillars.
- Review of Sustainability strategy, climate related disclosures and key performance metrics.
- Review of initiatives to support employee wellbeing including further improvement of the employee assistance programme.
- Review of initiatives to strengthen and embed Inclusion, Diversity and Equity throughout the Group, including receiving reports on engagement with employee interest groups at Board listening sessions.
- Review of initiatives to increase manager competencies and capabilities at the Compliance & Culture Committee meetings.

- 84 Letter from the Chair
- 18 Financial Review
- Setting priorities for capital investment across the Group.
- Reviewing and monitoring progress against the 12-point plan and related metrics in support of the Group strategy.
- Approving annual budget, financial plan, three-year strategic plan.
- Approving major borrowings and finance and banking arrangements.
- Issuance of debut €500 million EUR Corporate Bond.
- Repayment of €757 million of EUR bank term loans and $125 million of private placement debt.
- Approving changes to the composition of the Board, its Committees and the Executive Committee.
- Approving Group policies relating to sustainability, health and safety, Code of Conduct and Code of Share Dealing and other matters.

![img-13.jpeg](img-13.jpeg)

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GOVERNANCE
ACCOUNTS
OTHER INFORMATION

# Performance

![img-14.jpeg](img-14.jpeg)

208 Compliance & Culture Committee report

101 Audit Committee report

- Reviewing performance against strategy, budgets and financial and business plans.
- Approving half-year, full-year and trading updates.
- Strategic deep dives on global and regional franchise plans in Orthopaedics, Sports Medicine & ENT and Advanced Wound Management aligned to 12-point plan initiatives and broader long-term strategic initiatives.
- Monitoring Group operations updates and response to external and internal challenges in line with 12-point plan key metrics and deliverables.
- Determining the dividend policy and dividend recommendations.
- Overseeing succession planning at Board and senior management level.
- Approving the appointment and removal of the External Auditor on the recommendation of the Audit Committee.
- Approving significant changes to accounting policies or practices.
- Approving the use of the Company's shares for the Company's Share Plans.
- Review of performance and return on investment of acquisitions and integration planning.
- Review of global innovation pipeline and product portfolio with a focus on differentiation and delivery for our customers, patients and stakeholders.
- Continuing review and monitoring of impact of external factors such as inflation, supply constraints and localised lockdowns on ability to deliver on strategic objectives.

# Stakeholders

![img-15.jpeg](img-15.jpeg)

80 Our stakeholders

112 Engaging with Stakeholders

- Overseeing and maintaining relationships with stakeholders including employees, customers, suppliers, investors, regulators and governments. Further details of Board interactions with stakeholders can be found on pages 111-115.
- Review of gender pay gap data and reporting.
- Reviewing investor perspectives with external analysts in September and December 2022.
- Reviewing Gallup results.
- Reviewing Management Talent Pipeline and Succession Planning.
- Engaging with shareholders throughout the year on key issues such as strategy and operational performance, governance and succession planning with a focus on chair succession and ESG and related governance matters.
- Reviewing the fees of the Non-Executive Directors.

# Risk

![img-16.jpeg](img-16.jpeg)

69 Risk report

105 Risk management programme

- Overseeing the Group's risk management programme and related processes. See pages 69-77 for further details.
- Evaluation of risk with regard to initiatives within the 12-point plan.
- Review of the risk register and annual review of the Board appetite for risk.
- Review and approval of Principal Risks of the Group.
- Ongoing consideration of key risks within all Board discussions including impact of inflation, ESG considerations and reporting requirements, investment in IT and workforce engagement.
- Discussion at Board and Committee meetings on key topics including the potential impact of cybersecurity attacks and breaches in the current geopolitical context, regulatory changes, supply chain disruption, global talent outlook and post pandemic constraints and trends.

Investor Presentation
October-December 2022

![img-17.jpeg](img-17.jpeg)

Smith+Nephew

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www.smith-nephew.com

Smith+Nephew Annual Report 2022

95

Composition, succession and evaluation

# Board effectiveness review

The Board effectiveness review in 2022 was conducted internally by the Senior Independent Director Marc Owen supported by the Company Secretary. Mr Owen reviewed the results of the internal Board Evaluation conducted by Robin Freestone in 2020 and the external review conducted by Dr Tracy Long in 2021. Mr Owen spoke with Non-Executive Directors, the Chair and CEO in one-to-one discussions in November 2022 prior to summarising his findings which he presented to the Board for discussion in December 2022.

Mr Owen noted that 2022 has seen a period of significant change for the Company. Against a backdrop of external and internal operational challenges and share price performance, the Company has been through a CEO transition, SID transition and will undertake an upcoming Chair transition. He noted that this creates a Board environment where there is a shared urgency to see measurable improvements in performance whilst recognising that leadership needs time to effect lasting positive change.

The evaluation demonstrated the view that overall the Board operates effectively and that post pandemic the opportunity to meet in person and spend time informally with other Board members has been widely welcomed. It was felt that the Company, under new leadership, has a renewed energy and all Board members are anxious to support the actions being taken to improve performance. Feedback on Board mechanics was positive, with the number and duration of meetings being highly rated, the induction process positively regarded, and Board succession planning working well.

During the 2021 review, enhanced collaboration between Executive and Non-Executive Directors was highlighted as being an area for further development. As part of the 2022 Evaluation discussion, the Board continued to challenge themselves in terms of discussing the best way to constructively support and build trust with management and how best to focus on longer-term strategies to create shareholder value for the Company.

As a result of the internal evaluation, the Board has agreed the following actions for the next 12 months:

Actions identified

Management talent development - assess long-term approach to internal talent development and the Board's role in supporting this process.

External perspectives to inform Board discussions, with more information on industry trends and competitors.

Focus on longer-term strategic value and management support.

Actions Proposed/Taken

In 2022, the Board undertook an external evaluation and review of the CEO profile and internal talent succession in order to understand the strategic and operational needs and requirements of the Company and the desire to build an internal talent pipeline.

As part of the 2023 Yearly Planner, sessions and speakers with external perspectives are planned covering the medical devices regulatory environment, ESG and customer views on the Company.

Emphasis at each Board meeting on constructive support and building trust and focusing on longer-term strategy.

The areas for attention identified in the 2021 review externally facilitated by Dr Tracy Long, have been addressed as follows:

Actions identified

Focus on enhancing communication between the Board and management team between meetings, to develop a shared purpose.

Commence the search for a new Chair to replace Roberto Quarta, who will complete nine years' service at the end of 2022.

Ensure that Executive succession planning is discussed more frequently by the Board.

Action taken

Informal Monthly Board Meetings were established as regular touchpoints for the Board to communicate and hear from the Chief Executive Officer and the Chief Financial Officer directly.

The Senior Independent Director led an extensive search, Rupert Soames OBE to be appointed as Non-Executive Director and Chair Designate with effect from 26 April 2023, subject to shareholder approval.

The Board skills and composition matrix was discussed at Nomination & Governance Committee in July 2022 and circulated to the full Board for review. The matrix outlines tenure, skills and succession planning relating to a number of core metrics, which include the key areas on which the Board is required to report.

The reviews in 2023 and 2025 will be facilitated internally and led by the Senior Independent Director, supported by the Company Secretary. The 2024 review will be facilitated externally.

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OTHER INFORMATION

# Board development

## Timeline 2022

### May

- Site visit to Hull for Jo Hallas and Rick Medlock to meet with AWM Marketing Franchise leads, new Operations leadership, the Melton site project team and groups of key employees.

### September

- Board listening session with teams at manufacturing sites in Memphis, US.
- Site visit to manufacturing facilities in Memphis and the Power of One tour which provided an exhibition of Robotics and Real Intelligence strategy, innovation pipeline and differentiated sales and marketing strategies.

### December

- Interactive session with external expert on macro factors likely to impact global markets and within the healthcare industry in 2023 and beyond.
- Strategy review session with all key franchise leads and senior management to deep dive into key metrics for the 12-point plan and longer term plans for each global and regional franchise.

## 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 and stakeholders rather than formal training in what it is to be a Director. In 2022, we were able to resume in person visits and sessions within our Smith+Nephew facilities. Jo Hallas and Rick Medlock visited the Hull site in May which focused on our AWM business. Board members heard from the AWM global marketing team, the new Operations management team at the site and heard more about the Melton site project and other key initiatives. Board members were also able to tour the manufacturing facility and engage in discussions with the R&D team and other key employees during the visit. In September, prior to the full Board meeting, various Smith+Nephew sites in Memphis hosted the Board including the Brooks Road manufacturing facility and Appling Road. The Board also attended the Power of One exhibition where Board members were shown current products and our innovation pipeline, enhancing understanding of the differentiated offering through procedural selling within Orthopaedics and Sports Medicine.

We have also continued to provide our Directors with both virtual and physical opportunities to understand the business better as follows:

- At our Board meeting in September, our Chief R&D Officer, Vasant Padmanabhan and his R&D team presented on the global product innovation strategy across each of our franchises and our differentiated product pipeline demonstrating the future of innovation.
- Members of our Compliance & Culture Committee have held a number of Board/employee listening sessions both physically and virtually, where they have talked with employees and heard from them their views on what it means to work for Smith+Nephew. These sessions are discussed in more detail on pages 110 and 112.

The Chair regularly reviews the development needs of individual Directors and the Board as a whole.

## Induction for new Directors

During 2022, we implemented induction programmes for our CEO Deepak Nath who joined on 1 April 2022 and for Jo Hallas who had recently joined as a Non-Executive Director.

These programmes were tailored to their individual skills and experiences, and their roles on the Board. These induction programmes included:

- One-to-one meetings with senior executives to understand the roles played by our senior employees and specifically how we do things at Smith+Nephew.
- Meetings with our external advisers including brokers, external counsel, remuneration consultants and auditors, to explain the legal and regulatory background to their role on our Board and how these matters are approached at Smith+Nephew.
- Strategic presentations and site visits which were tailored to Executive and Non-Executive needs respectively in order to provide a strong foundation to learn about the organisation, its history, current and future opportunities and challenges and to give Board members an opportunity to ask questions and interact with our wider workforce.

Smith+Nephew Annual Report 2022

97

Composition, succession and evaluation continued

# Nomination & Governance Committee report

Roberto Quarta
Chair of the Nomination & Governance Committee

![img-18.jpeg](img-18.jpeg)

Membership

|  | Member from | Meetings attended |
| --- | --- | --- |
| Roberto Quarta (Chair) 1 | April 2014 | 5/6 |
| Erik Engstrom | April 2019 | 6/6 |
| Robin Freestone 2 | April 2019 | 5/5 |
| Marc Owen | March 2020 | 6/6 |
| Angie Risley 3 | September 2022 | 2/2 |

Our focus for 2023 will include:

- Search for Non-Executive Director to replace Erik Engstrom following completion of his 9 year tenure, in addition to the proposed replacement for Robin Freestone.
- Continuous review of Board composition to ensure alignment with the Company's strategic objectives and culture pillars.
- Continued oversight of succession planning below Board level.

www.smith-nephew.com/investor-centre/about-us/governance/corporate-documents-and-policies/terms-of-reference/

The Terms of Reference for the Nomination & Governance Committee describe the role and responsibilities of the Nomination & Governance Committee more fully and can be found on our website.

Responsibilities of the Nomination & Governance Committee

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.

In 2022, the Committee held six meetings together with a number of informal updates for Committee and Board members, which reflects the increased focus on Board succession planning including the Chair succession and search process. In addition to members of the Committee, the Company Secretary and Chief Executive Officer also attended these meetings as appropriate.

The following matters and actions were undertaken by the Committee in 2022:

- Recommended the appointment to the Board of the Chief Executive Officer, Deepak Nath, effective 1 April 2022. The Board has been impressed and encouraged with the speed at which Deepak has engaged with and developed a deeper understanding of the business and the urgency with which the 12-point plan has been developed, implemented and communicated both internally and externally aligned with our Strategy for Growth.
- Engaged with shareholders in relation to the chair search process.
- Continued to review the composition of the Board and its committees to ensure alignment with the Company's strategic objectives and culture pillars and with the developing external regulatory environment.

1 Due to unforeseen travel disruption, Roberto Quarta was prevented from attending the July 2022 Committee meeting.

2 Robin Freestone stepped down as a member of the Committee on 30 September 2022.

3 Angie Risley joined the Committee with effect from 1 September 2022.

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- Reviewed and approved the updated Board Skills Composition Matrix (please see table on page 100) which sets out the tenure, skills, competencies and diversity of the Board to enable effective succession planning for Non-Executive and Executive Directors.
- Following Robin Freestone's decision to step down as Senior Independent Director and member of the Nomination & Governance and Audit Committees, it was recommended that Marc Owen be appointed as Senior Independent Director in light of his skills, competencies and knowledge of the Company, the industry in which it operates and his commitment to best practice in terms of corporate governance.
- Strengthened the Nomination & Governance Committee with the appointment of Angie Risley and the Audit Committee with the appointment of Jo Hallas in September 2022 to add diversity of perspective.
- Circulated and discussed a refreshed CEO profile with a view to succession planning in respect of both internal and external candidates, taking into account the challenges and opportunities facing the Company, the skills and expertise likely to be required by the Board in the future and the benefits of diversity in its widest sense.
- Monitored the changes to the organisational structure and approved changes to key leadership roles. Individual Directors have acted as a sounding board for the executive team when considering succession plans in key areas.
- Discussed succession plans with management for executives below Board level. These plans included consideration of diversity in the executive pipeline. Page 89 gives details of the members of the Executive Committee, 40% of whom are female, one of whom is of African heritage and one of Asian ethnicity. The Committee will continue to monitor diversity in the executive pipeline.
- Conducted a mid year review of conflicts of interest in order to review and ensure the continued independence of the Non-Executive Directors.
- Reviewed the governance of the Board and its Committees, approving the Terms of Reference of the Board Committees and the Matters Reserved to the Board.
- Led by the Senior Independent Director, ensured oversight of the internal Board Evaluation process and recommended follow-up actions to the Board following the Evaluation review in December 2022.

## Chair and Non-Executive Director search

Following Robin Freestone's departure, Marc Owen drove the continued search for our new Chair. Russell Reynolds1 was appointed as search agent to progress the Chair search at pace, ensuring that we were presented with a diverse set of candidates for consideration. The Committee recommended and the Board aligned on three core characteristics required for the new Chair: (i) a proven track record of demonstrating creation and delivery of shareholder value; (ii) a strong background in governance, ideally within a UK FTSE environment; and (iii) the ability to support and develop the Chief Executive Officer, either through previous CEO experience or through development of a CEO as part of a Board role.

The Committee also considered the criteria of healthcare industry experience and corporate finance experience but the search was focused on finding a Chair who demonstrates performance ethic and track record, UK governance experience and CEO development. In advance of finalising the shortlist of candidates for the new Chair, Marc Owen engaged with shareholders on the proposed criteria which resonated well with the consultation group based on feedback received.

After an extensive search, it was announced on 17 February 2023 that subject to shareholder approval, Rupert Soames will be appointed to the Board as a Non-Executive Director and Chair-designate at our AGM and will join the Nomination & Governance and Remuneration Committees upon appointment. In order to ensure a smooth transition to Rupert, Roberto Quarta has agreed to remain as Chair until 15 September 2023 and will put himself forward for re-election at the AGM on this basis.

## Diversity

The Committee believes that a balanced, diverse Board is stronger and better equipped to consider the risks, opportunities and challenges facing the Company, understanding the views of all stakeholders, including our shareholders, in order to reach decisions which take into account a wider range of perspectives. The aim is for the Board to have a wide range of backgrounds, skills and experiences and value a diversity of outlook, approach and style in Board members. The Committee believes the Board's composition gives us the necessary balance of diversity, skills, experience, independence and knowledge to ensure continued efficiency in running the business and delivery of sustainable growth.

In order to ensure that the Board remains diverse and that members have the skillsets to support and deliver shareholder value as the business evolved, the Committee analyses the skills and experiences required on an ongoing basis against the skills and experiences of the Board using the matrix on page 100. The Committee review this matrix regularly to ensure that it is refreshed to meet the changing needs and strategic and operational imperatives of the Company.

Diversity is not simply a matter of gender, ethnicity, social or other measurable characteristics. 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 competence on governance and regulatory matters to understanding the business in which we operate and the needs of our stakeholders. It needs some members with a long corporate memory and others who bring new insights from other fields. To perform effectively, the Board needs to be both supportive and challenging. When selecting new directors for the Board, the Committee looks for members with suitable professional backgrounds, who provide new perspectives. The Committee will continue to appoint Directors on merit, valuing the unique contribution that they will bring to the Board, regardless of gender, ethnicity or any other diversity measure. The diversity statement is located on our website: www.smith-nephew.com/en/about-us/corporate-governance/diversity-statements.

1 Russell Reynolds was also selected by the Company in 2022 to act as agent for two other senior management search processes.

Smith+Nephew Annual Report 2022

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## Composition, succession and evaluation continued
### Nomination & Governance Committee report continued

#### Board and Leadership Succession Planning

In order to support the Company to meet its strategic objectives, the Committee has aimed to strengthen the capabilities of the Board in terms of skills, composition and diversity and have appointed Board members with industry specific knowledge and broad geographical experience. The Committee has also sought to enhance the induction programmes for new Board members who had joined during the pandemic through site visits, listening sessions and focused Board sessions relating to strategic and macroeconomic matters.

Succession planning is a key focus for the Board from both a leadership and governance perspective. The Board composition and skills matrix feeds into a formal rolling succession plan for Directors. The Committee starts board recruitment well ahead of retirements, understanding the competitiveness of the market. Priorities for recruiting and succession planning include the ability to respond to evolving strategic imperatives for the company, adding and enhancing Board skills including in the areas of healthcare sector perspectives, operational experience and ESG and enhancing diversity in the boardroom.

The Committee has also worked with an independent third party to review the profile of the Chief Executive Officer role and has developed a profile focused on the skills required to lead the business moving into the future. The Committee also focused on development for leaders to ensure that the potential internal pipeline of candidates is strengthened.

Russell Reynolds, a third party search agent, has been appointed to find a candidate with the requisite financial skills and experience to provide support to the Board and particularly to Rick Medlock on the Audit Committee following Robin Freestone's departure. The Board will provide an update on this search process once a recommendation has been considered and approved.

#### Board gender diversity

![img-0.jpeg](img-0.jpeg)

**63.7% male**
**36.3% female**

#### Board nationality

- American 3
- British 3
- German/Polish 1
- Swedish 1
- British/American 1
- British/French 1
- American/Italian 1

![img-1.jpeg](img-1.jpeg)

#### Board tenure

- Under 12 months 2
- 1-3 years 5
- 4-8 years 3
- >9 years 1

![img-2.jpeg](img-2.jpeg)

#### Skills and experience matrix

|  | CEO | Financial | International | Healthcare/ Medical Devices | Emerging Markets | UK Governance | Remuneration |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Roberto Quarta | • |  | • |  | • | • | • |
| Deepak Nath |  |  | • | • | • |  |  |
| Anne-Françoise Nesmes |  | • | • | • | • | • |  |
| Erik Engstrom | • |  | • |  |  | • | • |
| Jo Hallas | • |  | • |  | • | • | • |
| John Ma | • |  | • | • | • |  |  |
| Katarzyna Mazur-Hofsaess |  |  | • | • | • |  |  |
| Rick Medlock |  | • | • |  |  | • | • |
| Marc Owen | • |  | • | • |  |  |  |
| Angie Risley |  |  |  |  |  | • | • |
| Bob White |  |  | • | • | • |  | • |

During 2022, the Board has benefitted from the diversity of experience, background and global and regional expertise of its members. As a new Chair takes the reins, the Board will continue to evaluate the requirements of a Company which is dual listed on the London and New York Stock Exchanges with its focus on key priority markets.

FTSE 350 companies to have at least one woman in the Chair or Senior Independent director role on the Board, and/or one woman in the Chief Executive or Finance Director role in the company by the end of 2025.

**Year achieved**
**2020**

Anne-Françoise Nesmes was appointed Chief Financial Officer in July 2020.

![img-3.jpeg](img-3.jpeg)

The balance on the Board of strong industry knowledge and experience with a solid appreciation of the UK environment will enable the Board to continue to support and challenge effectively in the years to come.

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Audit, Risk and Control

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# Audit Committee report

Rick Medlock
Chair of the Audit Committee

![img-4.jpeg](img-4.jpeg)

Membership*

|  | Member from | Meetings attended |
| --- | --- | --- |
| Rick Medlock (Chair) 1 | April 2020 | 8/8 |
| Erik Engstrom | January 2015 | 8/8 |
| Robin Freestone 2 | September 2015 | 6/6 |
| Marc Owen | October 2017 | 8/8 |
| Jo Hallas 3 | September 2022 | 3/3 |

Our focus for 2023 will include:

- Monitoring ESG and TCFD reporting.
- Continued oversight of risk management process.
- Monitoring of Cybersecurity controls.
- Supporting the transition of the external auditors.
- Ensuring that we review and consider all UK governance changes following the establishment of Audit Reporting and Governance Authority (ARGA).

www.smith-nephew.com

The Terms of Reference of the Audit Committee describe the role and responsibilities more fully and can be found on our website.

1 Designated financial expert under the SEC Regulations or recent and relevant financial experience under the UK Corporate Governance Code.

2 Robin Freestone stepped down as member of the Committee on 30 September 2022.

3 Jo Hallas joined the Audit Committee on 1 September 2022.

* All members of the Committee are deemed to be independent Directors.

Responsibilities of the Audit Committee

The Committee's key roles are to:

- Ensure the integrity of the Company's financial reporting to shareholders and any announcements relating to the Group's financial performance.
- Ensure financial statements comply with UK and US statutory requirements.
- Review the content of the Annual Report and Accounts and advise the Board on whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
- Monitor the effectiveness of internal controls and compliance with the 2018 UK Corporate Governance Code and the SOX Act.
- Ensure the effectiveness of the internal audit function, agree audit plans and consider outcomes of internal audits.
- Review the operation of the Group's risk management framework.
- On behalf of the Board, carry out a robust assessment of the principal and emerging risks facing the Group.
- Ensure the effectiveness of the external audit function, agree the scope of the audits (including materiality thresholds and areas of risk for focus) and the auditor's fees and terms of engagement.
- Consider any reported frauds and any concerns raised by the Company's whistleblowing process.
- Oversee other matters, including cybersecurity, IT governance, ESG, tax and treasury.

The Committee met eight times during the year, with meetings timed to coincide with the financial and reporting cycles of the Company. In addition the Committee met with both the Company's external auditor and Group Head of Internal Audit without management present.

During 2022, outside of the routine matters undertaken by the Committee (as set out in its Terms of Reference), the Committee has focused on the following matters:

- Monitored progress on and enhancement of our ESG reporting plan including TCFD.
- Continued oversight of the governance and maturity plan for our IT framework and controls.
- Implemented the recommendations from the external review of the Internal Audit function that was carried out in 2021.
- Carried out a deep dive on information security and cyber resilience.

The Committee also accelerated the audit tender process, which resulted in Deloitte being recommended to the Board as the Company's new auditors, effective from 1 January 2024. Information on the tender process can be found on page 104 of my report.

The Committee has satisfied itself that the Smith & Nephew plc 2022 annual report and accounts is fair, balanced and understandable. The Committee therefore supports the Board in making its formal statement on page 147.

Smith+Nephew Annual Report 2022

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## Audit, Risk and Control continued
### Audit Committee report continued

## Significant matters related to the financial statements

We considered the following key areas of judgement in relation to the 2022 financial statements and at each half year and quarterly trading report, which we discussed in all cases with management and the External Auditor:

### Valuation of inventories

A feature of the Orthopaedics franchise (which accounts for approximately 60% of the Group's total inventory and approximately 80% of the total provision for excess and obsolete 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 products, 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. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical usage. This formula is applied on an individual product line basis and typically is first applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience, but it does involve management estimation of customer demand, effectiveness of inventory deployment, length of product lives and phase-out of old products.

#### Our action

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% at 31 December 2022 (2021: 21%). We challenged the basis of the provisions and concluded that the proposed levels were appropriate and have been consistently estimated.

#### Challenge by KPMG

During 2022 KPMG challenged management's approach to inventory provisioning considering recovery of demand in 2022.

### 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 and uses third-party actuarial modelling where appropriate. 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 and settlement negotiations or if investigations bring to light new facts.

#### Our action

As members of the Board, we receive regular updates from the Group General Counsel & Company Secretary. These updates form the basis for the level of provisioning. The Group carries a provision relating to potential liabilities arising on its portfolio of metal-on-metal hip products of $239 million as of 31 December 2022. We received detailed reports from management on this position, including the actuarial model used to estimate the provision, and challenged the key assumptions including the number of claimants and projected value of each claim. The provisions for legal matters have decreased by $56 million during the year, primarily due to utilisation of the metal-on-metal provision. We have determined that the proposed levels of provisioning at year end of $264 million included within 'provisions' in Note 17.1 in 2022 (2021: $320 million) were appropriate in the circumstances.

#### Challenge by KPMG

KPMG challenged management's assumptions in determining the provisions for metal-on-metal hip claims including the work of management appointed actuaries.

### Impairment

In carrying out impairment reviews of goodwill and acquisition intangible assets, 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.

#### Our action

We reviewed management's reports on the key assumptions with respect to goodwill and acquisition intangible assets - particularly the forecast future cash flows and discount rates used to make these calculations. We had a particular focus on goodwill impairment testing for the Orthopaedics CGU as the level of headroom has decreased and is sensitive to a reasonably possible change in assumptions. We challenged the downside sensitivity analyses undertaken. We concluded that the carrying value of these assets is appropriately supported by the cash flow projections. We have also considered the disclosure surrounding these reviews, and concluded that the review and disclosure were appropriate.

#### Challenge by KPMG

KPMG challenged management on the impairment conclusions and the basis of the assessment.

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## Other matters related to the financial statements

As well as the identified significant matters, other matters that the Audit Committee considered during 2022 were:

### Going concern

The impact of a global economic recession has been considered as part of the adoption of the going concern basis in these financial statements. We reviewed three-year projections as part of the Group's Strategic Plan, and also more detailed cash flow scenarios to 30 March 2024 for going concern purposes and concurred with management that the continued adoption of the going concern basis is appropriate.

### Taxation

The Group operates in numerous tax jurisdictions around the world and is subject to factors that may affect future tax charges. We annually review policies and approve the principles for management of tax risks. We review quarterly reports from management evaluating the existing tax profile, tax risks and tax provisions. Based on a thorough report from management of tax liabilities and our challenge of the basis of any tax provisions recorded, we concluded that the levels of provisions and disclosures were appropriate.

We noted The Financial Reporting Council (FRC) included the Group's financial statements for the year ended 31 December 2021 in their selection for the thematic review of companies' disclosures relating to deferred tax assets. The FRC completed a limited scope review of the Group's 2021 Annual Report and, based on their review, the FRC has not raised any questions to date with the Group.

### Post-retirement benefits

The Group has post-retirement defined benefit pension schemes, which require estimation in setting the assumptions. We received a report from management setting out their proposed assumptions for the UK and US schemes and concurred with management that these assumptions were appropriate.

## Climate change

The impact of climate change has been considered as part of our review of the impairment testing of goodwill and acquired intangible assets, and the going concern assessment. We have also considered the disclosures on climate change and considered them appropriate.

### Since the year end

Since the year end, we have also reviewed the results for the full year 2022, Annual Report and Accounts for 2022, and have concluded that they are fair, balanced and understandable. 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 pages 14-15, risks and the key performance indicators and their link to the strategy.

## External auditor

### Independence of external auditor

Following a competitive tender in 2014, KPMG was appointed external auditor of the Company in 2015. We are satisfied that KPMG is fully independent from the Company's management and free from conflicts of interest. 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 also governs our approach when we require our external auditor to carry out non-audit services, and all such services are strictly governed by this policy.

The Auditor Independence Policy also governs the policy regarding audit partner rotation with the expectation that the audit partner will rotate at least every five years. Paul Nichols was appointed as our senior lead audit partner on 1 January 2022.

The Audit Committee confirms it has complied with the provision of the Competition and Markets Authority (CMA) Order 2014.

## Effectiveness of external auditor

We conducted a review into the effectiveness of the external audit as part of the 2022 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.

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

The Audit Committee regularly receives feedback from KPMG, including at each meeting where management present their summary of critical accounting estimates as at each quarter end.

Overall therefore, we concluded that KPMG had carried out their audit for 2022 effectively.

The Audit Committee continues to review the effectiveness of the external auditor, KPMG.

## Appointment of external auditor at Annual General Meeting

Resolutions will be put to the Annual General Meeting to be held on 26 April 2023 proposing the re-appointment of KPMG as the Company's auditor and authorising the Board to determine its remuneration, on the recommendation of the Audit Committee in accordance with the CMA Order 2014.

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## Audit, Risk and Control continued
### Audit Committee report continued

#### Audit Tender

KPMG has been our auditors since 2015 and during the year we recommended to the Board that the audit tender process be accelerated with a view to appointing new auditors from 1 January 2024. As well as KPMG, two other firms were invited to submit tenders. The audit tender process was led by me as Chair of the Audit Committee and a robust process was carried out.

We had a common set of criteria for evaluating the proposals including:

- Audit approach and quality.
- The lead partner and their audit team.
- Sector experience.
- Approach to resolving issues or matters of judgement.
- Transition plans.
- Use of technology.

The proposals presented by the firms were subject to detailed evaluation and discussion which enabled us to recommend to the Board the appointment of Deloitte as the preferred new auditor. The Board endorsed this recommendation. Deloitte will begin transitioning in 2023 and become auditors from 1 January 2024, subject to shareholders' approval at the Annual General Meeting in 2024.

#### Disclosure of information to the auditor

In accordance with Section 418 of the Companies Act 2006, the Directors serving at the time of approving the Directors' Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of which the auditor, KPMG, is 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.

#### Non-audit fees paid to the auditor

Non-audit fees are subject to approval in-line with the Auditor Independence Policy which is reviewed annually and forms part of the Terms of Reference of the Audit Committee.

The Audit Committee recognises the importance of the independence of the external auditor and ensures that the auditor's independence should not be breached. The Audit Committee ensures that the auditor does not receive a fee from the Company or its subsidiaries that would be deemed large enough to impact its independence or be deemed a contingent fee. The total fees for permitted non-audit services shall be no more than 70% of the average of the fees paid in the last three consecutive financial years for the statutory audits of the Company and its subsidiaries.

Any pre-approved aggregate, individual amounts up to $25,000 may be authorised by the Group Treasurer and SVP Group Finance respectively and amounts up to $50,000 by the Chief Financial Officer. Any individual amount over $50,000 must be pre-approved by the Chair of the Audit Committee. If unforeseen additional permitted services are required, or any which exceed the amounts approved, again pre-approval by the Chair of the Audit Committee is required.

The following reflects the non-audit fees incurred with KPMG in 2022, which were approved by the Chair of the Audit Committee.

|  | 2022 $ million | 2021 $ million |
| --- | --- | --- |
| Audit-related services | 0.4 | 0.1 |

Audit related fees in 2022 primarily consist of routine services provided in respect of the EUR bond issue and was deemed by the Committee not to infringe auditor objectivity or independence. The ratio of non-audit fees to audit fees for the year ended 31 December 2022 is 0.04. The ratio of non-audit fees to audit fees for the year ended 31 December 2021 was 0.01.

Full details are shown in Note 3.2 to the Notes to the Group accounts.

#### Audit fees paid to the auditor

Fees for professional services provided by KPMG, the Group's independent auditor in each of the last two fiscal years, in each of the following categories were:

|  | 2022 $ million | 2021 $ million |
| --- | --- | --- |
| Audit fees | 9.4 | 7.5 |
| Audit-related fees | 0.4 | 0.1 |
| Total | 9.8 | 7.6 |

#### Internal audit

The internal audit team, which reports functionally to the Audit Committee, carries out risk-based reviews across the Group. These reviews examine the management of risks and controls over financial, operational, commercial, IT and transformation programme activities.

The audit team, led by the Group Head of Internal Audit, consists of appropriately qualified and experienced employees. Third parties may be engaged to support audit work as appropriate.

The Group Head of Internal Audit has direct access to, and has regular meetings with, the Audit Committee Chair and prepares formal reports for Audit Committee meetings on the activities and key findings of the function, together with the status of management's implementation of recommendations. The Audit Committee has unrestricted access to all internal audit reports, should it wish to review them.

During the year, the team completed 35 risk-based audits and reviews across the Group. These included: financial controls effectiveness reviews across the EMEA, APAC, US and LATAM regions; IT and various programme assurance reviews ranging from end user computer security to IT controls effectiveness; and an ERP pre-implementation review in Malaysia. Group-level reviews included enterprise risk management effectiveness, data privacy controls, ESG governance, capital expenditure controls, shared services operations and fraud risk management effectiveness. Key issues noted during reviews included the need for all documentation relating to controls operation to be stored in the central repository. Management has taken swift action to implement Internal Audit's recommendations. The team was able to travel to a number of locations, following the relaxing of Covid-related restrictions and there was continued use of data extraction and analysis techniques during all work.

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The function carries out its work in accordance with the standards and guidelines of the Institute of Internal Auditors. Its performance is annually assessed using a structured questionnaire, allowing non-executive, executive and senior management, plus the external auditor, to comment on key aspects of the function's performance. In addition, Grant Thornton carried out an evaluation of the function and concluded that it was operating effectively. The Audit Committee, which re-approved the function's charter in December 2022, has satisfied itself that adequate, objective internal audit standards and procedures exist within the Group and that the Internal Audit function is effective.

## Risk management programme

Whilst the Board is responsible for ensuring oversight of strategic risks relating to the Company, determining an appropriate level of risk appetite, and monitoring risks through a range of Board and Board Committee processes, the Audit Committee is responsible for ensuring oversight of the processes by which operational risks, relating to the Company and its operations are managed and for reviewing financial risks and the operating effectiveness of the Group's Risk Management process.

During the year, we reviewed our Risk Management processes and progress was discussed at our meetings in February, April, July, and December. We approved the Risk Management programme for 2022 and monitored performance against that programme, specifically reviewing the work undertaken by the risk champions across the Group, identifying the risks which could impact their areas of our business.

The Risk Management programme followed the risk management policy and manual communicated company-wide in 2022. This programme combines a 'bottom-up' approach (whereby risks are identified within business areas by local risk champions working with their leadership teams), with a 'top-down' approach (when the Executive Committee meets as the Risk Committee to consider the risks facing the Group at an enterprise level).

Throughout the year, the Audit Committee maintained oversight of this programme. We reviewed the Principal Risks identified and the heat maps prepared by management showing how these risks were being managed. We considered where the risk profile was changing.

Since the year end, we have reviewed a report from the Group Head of Internal Audit into the effectiveness of the Risk Management programme throughout the year. We considered the Principal Risks, the actions taken by management to review those risks and the Board risk appetite in respect of each risk. We concluded that the Risk Management process during 2022 and up to the date of approval of this Annual Report was effective. Work will continue in 2023 and beyond to continue to enhance the process.

### Risk Report

## Viability Statement

We also reviewed management's work in conducting a robust assessment of those risks which would threaten our business model and the future performance or liquidity of the Company, including its resilience to the threats of viability posed by those risks in severe but plausible scenarios. Management have considered various scenarios in assessing the impact of a global economic recession, with the key judgement applied being the speed and sustainability of the return to a normal volume of elective procedures in key markets. This assessment included stress and sensitivity analyses of these risks to enable us to evaluate the impact of a severe but plausible combination of risks. We then considered whether additional financing would be required in such eventualities. Based on this analysis, we recommended to the Board that it could approve and make the Viability Statement on pages 78-79.

## Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the financial review on pages 18-21 and the Principal Risks on pages 71-77.

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described on pages 18-21. In addition, the Notes to the Group accounts include: the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.

The Group has considerable financial resources and its customers and suppliers are diversified across different geographic areas. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully despite the ongoing uncertain economic outlook.

The continued uncertainty as to the future impact on the financial performance and cash flows of the Group as a result of a global economic recession has been considered as part of the adoption of the going concern basis in these financial statements. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis for accounting in preparing the annual financial statements. Management also believes that the Group has sufficient working capital for its present requirements.

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## Audit, Risk and Control continued
### Audit Committee report 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 country business units. The main elements of the internal control framework are:

- The management of each country and Group function is responsible for the establishment, maintenance and review of effective financial controls within their business unit or function.
- The Group's IT organisation is responsible for the establishment of effective IT controls within the core financial systems and underlying IT infrastructure.
- The Financial Controls & Compliance Group has responsibility for the review of the effectiveness of controls operating in the countries, functions and IT organisation, by either: performing testing directly, reviewing testing performed in-country, or utilising a qualified third party to perform this management testing on its behalf.
- The Group Finance Manual sets out financial and accounting policies, and is updated regularly. The Group's Minimum Acceptable Practices (MAPs) were updated in 2022 emphasising the timing of control operation and splitting controls between Key and Non-Key controls within the Risk and Control Matrix. The business is required to self-assess their level of compliance with the MAPs on a monthly basis and remediate any gaps.
- MAPs compliance is validated through spot-checks conducted by the Financial Controls & Compliance Group and Internal Audit, as well as during wider Internal Audit reviews performed throughout the year. The technology solution to facilitate the real time monitoring of the operation and testing of controls is now fully operational and has driven improvements in the control environment.
- There are clearly defined lines of accountability and delegations of authority.
- The Internal Audit function executes a risk-based annual work plan, as approved by the Audit Committee. The Audit Committee reviews reports from Internal Audit on their findings on internal financial controls, including compliance with MAPs and from the SVP Group Finance and the heads of the Financial Controls & Compliance, Taxation and Treasury functions.
- The Audit Committee reviews regular reports from the Financial Controls & Compliance Group with regard to compliance with the SOX (Sarbanes Oxley) Act including the scope and results of management's testing and progress regarding any remediation, as well as the aggregated results of MAPs self-assessments using dashboards which are updated on a daily basis.
- Business continuity planning, including preventative and contingency measures, back-up capabilities and the purchase of insurance.
- Risk management policies and procedures including segregation of duties, transaction authorisation, monitoring, financial and managerial review and comprehensive reporting and analysis against approved standards and budgets.
- A treasury operating framework and Group treasury team, accountable for treasury activities, which establishes policies and manages liquidity and financial risks, including foreign exchange, interest rate and counterparty exposures. Treasury policies, risk limits and monitoring procedures are reviewed regularly by the Audit Committee or the Finance & Banking Committee, on behalf of the Board.
- Our published Group tax strategy which details our approach to tax risk management and governance, tax compliance, tax planning, the level of tax risk we are prepared to accept and how we deal with tax authorities, which is reviewed by the Audit Committee on behalf of the Board.
- The Audit Committee reviews the Group whistle-blower procedures to ensure they are effective.

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. Entities where the Company does not hold a controlling interest have their own processes of internal controls.

We have reviewed the effectiveness of the Company's internal controls over financial reporting. The Company's assessment included documenting, evaluating and testing the design and operating effectiveness of its internal controls over financial reporting. Based on this evaluation, we have satisfied ourselves that we are meeting the required standards and that our internal control over financial reporting is effective both for the year ended 31 December 2022 and up to the date of approval of this Annual Report. No concerns were raised with us in 2022 regarding possible improprieties in matters of financial reporting.

This process complies with the FRC's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' under the UK Corporate Governance Code and additionally contributes to our compliance with the obligations under the SOX Act and other internal assurance activities. There has been no change 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.

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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 its Internal Audit function, reviews the adequacy and effectiveness of internal control procedures and identifies any significant weaknesses and ensures these are remediated within agreed timelines. The latest review covered the financial year to 31 December 2022 and included the period up to the approval of this Annual Report. The main elements of this review are as follows:

- The Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the design and operation of the Group's disclosure controls and procedures as at 31 December 2022. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded on 21 February 2023 that the disclosure controls and procedures were effective as at 31 December 2022.
- 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 2022 in accordance with the requirements in the US under section 404 of the SOX Act. In making that assessment, they used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on their assessment, management concluded and reported that, as at 31 December 2022, the Group's internal control over financial reporting was effective based on those criteria. Having received the report from management, the Audit Committee reports to the Board on the effectiveness

of controls. KPMG, an independent registered public accounting firm, audited the financial statements included in the 2022 Annual Report, containing the disclosure required by this item, issued an attestation report on the Group's internal control over financial reporting as at 31 December 2022.

## 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 SVP 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 substantive amendments to the Code during 2022 or up until 21 February 2023. A copy of the Code of Ethics for Senior Financial Officers can be found on our website.

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

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Audit, Risk and Control continued

# Compliance & Culture Committee report

Marc Owen

Chair of the Compliance & Culture Committee

![img-5.jpeg](img-5.jpeg)

In 2022, the Committee held four meetings. Each meeting was attended by all members of the Committee. The Group General Counsel and Company Secretary, the Chief Compliance Officer, the Chief Quality & Regulatory Affairs Officer, Chief HR Officer and President of Global Operations (responsible for reporting on sustainability) also attended all or part of the meetings by invitation.

## Membership

|  | Member from | Meetings attended |
| --- | --- | --- |
| Marc Owen (Chair) | March 2018 | 4/4 |
| John Ma Katarzyna | December 2021 | 4/4 |
| Mazur-Hofsaess | April 2021 | 4/4 |
| Angie Risley | April 2020 | 4/4 |
| Bob White | July 2020 | 4/4 |

## Our focus for 2023 will include:

- Continued oversight of the Company's sustainability programme, including targets and monitoring its roll-out to the Group.
- Assist with determining appropriate ESG metrics for the Performance Share Programme.
- Monitoring the progress of the Company's commitment to its net zero roadmap by 2045.
- Ensure stakeholder considerations continue to be embedded into all Board decisions.
- Continue to monitor regulatory developments which may impact the Strategy for Growth and 12-point plan.
- Further Board/employee listening sessions to enable the Board to further monitor and assess the corporate

culture globally taking into account post pandemic considerations and impact of localised lockdowns.

- Monitor the actions taken by management following 2022's Board/employee listening sessions.
- Review further employee feedback gathered through the annual survey and other mechanisms to ensure the Board is aware of employees' views and any resulting actions required by management. Recent survey results are discussed on page 48-49.
- Developing the programme for the Committee and Board to meet and receive direct feedback from our other stakeholders with a focus on ESG considerations which are of interest to specific stakeholder groups.

## Responsibilities of the Compliance & Culture Committee

### Ethics and compliance

- Overseeing ethics and compliance programmes, strategies and plans.
- Monitoring ethics and compliance process improvements and enhancements.
- Assessing compliance performance based on monitoring, auditing and internal and external investigations data.
- Discussion of allegations of significant potential compliance issues.
- Receiving reports from the Group General Counsel and Company Secretary and Chief Compliance Officer.
- Reviewing data privacy elements of the Global compliance programme

and related regulatory developments which impact our business.

### Sustainability

- Overseeing the sustainability strategy and reviewing targets and metrics, particularly with regard to the Scope 3 roadmap and new and enhanced reporting regulations on ESG matters.
- Receiving and assessing regular functional reports from the ESG Operating Committee and Global President Operations.

### Culture

- Oversight of our relationship with stakeholders, including the employee voice and sustainability.

- Receiving and assessing regular reports and presentations from the Chief Human Resources Officer relating to key employee issues such as purpose and culture, talent, engagement and Inclusion, Diversity and Equity ("IDE").

### Quality and regulatory Affairs (QARA)

- Overseeing the processes by which regulatory and quality risks relating to the Company and its operations are identified and managed.
- Receiving and assessing regular functional reports and presentations from the Chief Quality & Regulatory Affairs Officer.

www.smith-nephew.com/investor-centre/about-us/governance corporate-documents-and-policies/terms-of-reference/

The Terms of Reference for the Compliance & Culture Committee describe the role and responsibilities of this Committee more fully and can be found on our website.

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## Ethics and compliance

As stated in the Code of Conduct, the sustainability of our business depends on doing business the right way and ensuring the third parties that we work with share our perspective.

This year the Committee maintained oversight of our ethics and compliance programme activities within our business and continued to review external factors which could impact the business. The Chief Compliance Officer provided regular reports demonstrating the effectiveness of the Global Compliance programme as well as continuous improvement efforts to ensure our ethics and compliance programme activities are evolving in alignment with our strategy for growth and 12-point plan objectives.

The Committee is provided with updates on allegations of potentially significant issues which are raised through the Company's hotline or to our Compliance team and the Company's response to such matters, and also receive an annual review of investigations and enforcement trends in the industry.

The Committee also received an update on the progress of a continuous improvement plan for the Compliance Validation Assignment (CVA) programme and noted significant improvements including reduced report times, enhancements to the risk assessment process for third parties, and increased collaboration and best-practice sharing with other assurance providers. The Committee received a report from a self-assessment of the Compliance programme, which we understand will be conducted on an annual basis.

These reports demonstrated that the organisation has established, mature processes and controls over ethics reporting and investigations.

The Committee received regular updates on findings from compliance verification activities and the adaptation of processes to accommodate restrictions and altered risk profiles post pandemic.

During 2022, the Committee also received an update on our privacy programme, with a specific focus on evolution of the programme in light of changing regulatory environments in many of the markets in which we operate.

## Sustainability

In 2022, sustainability and ESG matters more generally have continued to receive focus and scrutiny from the Board and its Committees with strong focus on the Company's sustainability strategy and agenda. The Committee reviewed the Company's sustainability programme to ensure alignment with stakeholder expectations and monitored management's actions taken against our targets.

Throughout the year, the Committee received updates from the Global President Operations on our performance against Scope 1 and 2 emissions and received an update on the proposed development of the Scope 3 roadmap demonstrating our progress towards our net zero commitment by 2045. We also received updates on our network optimisation projects and the ways in which ESG considerations have been considered within our facilities in Malaysia, Costa Rica and the proposed new Advanced Wound Management facility at Melton near Hull. In February 2022 we reviewed and approved the 2021 Sustainability Report and in April we reviewed and approved the Conflict Minerals declaration and Modern Slavery statements, in each case prior to Board approval.

The Company has engaged with ISS and other institutional investment teams to understand how the Company benchmarks against others in the industry and to seek further ways to demonstrate our performance to investors.

Customers are increasingly requiring Smith+Nephew to align with and demonstrate shared sustainability goals. The Committee reviewed the reporting requirements around climate change, reporting against the TCFD and SASB frameworks, and approved our revised carbon reduction target. Since the year end, the Committee has approved the 2022 Sustainability Report.

Sustainability

## Quality and regulatory affairs

Product safety and effectiveness is at the foundation of our business. Regulatory authorities across the world enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. During 2022, the Committee received and reviewed summary reports of the Company's performance against internal and external KPIs and metrics, which display oversight regarding the quality and regulatory activities of our business.

At each meeting, the Committee received a briefing on key matters from the Chief Quality & Regulatory Affairs Officer. The Committee reviewed results of external regulatory inspections and audits conducted by the FDA and other regulatory agencies. The Committee also reviewed results of internal quality audits and key performance metrics associated with critical quality and regulatory compliance processes. The Committee received reports regarding preparation for emerging regulations applicable to our business and also received updates on the important efforts to ensure compliance with the EU Medical Device Regulation.

During the year, the Committee reviewed progress in areas of focus such as design for manufacturability at our Malaysia site and overall quality and manufacturing improvements at key sites across the business. The Committee also discussed our continued efforts on Quality System simplification leading to continued efficiency across our network.

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## Audit, Risk and Control continued

### Compliance & Culture Committee report continued

#### Culture

During 2022, the Company's core purpose of Life Unlimited and the supporting culture pillars of Care, Courage and Collaboration continued to be embedded. Our strategic objectives and culture pillars provide alignment across our business and stronger understanding by employees of their role in supporting our collective success.

The Committee was provided with regular updates on culture from the Chief HR Officer throughout 2022. The specific actions for the year relating to culture included the plan for engaging and developing our future leaders, the plans in place to ensure leadership and employees are engaged and contribute to a high performing and purpose driven company; the continuation of Board/employee listening sessions; the launch of the People Leader Hub containing resources to support key management/employee practices, skills and behaviours; a continued focus on inclusion, diversity and equity through employee inclusion groups (EIGs) and internal and external initiatives; and monitoring success through the annual Gallup engagement survey.

The Committee received an update on how the Company had defined the specific expectations and behaviours needed to deliver on its strategy and support the Company's culture. Our Commitments were approved by the Board and define the specific ways in which the Company expects employees to demonstrate our culture. In 2022, the nine Commitments

and three behaviours defining each of our culture pillars were launched to all employees through a leader-led cascade. From the nine culture Commitments, the initial focus for 2023 is on three that are most critical to delivering our strategy and 12-point plan: Deliver for Customers (Care); Take Accountability (Courage) and Find Solutions (Collaboration).

During 2022, the Committee received an update on the ten EIGs covering gender, race and ethnicity, veterans, mental health and physical wellbeing, generations, the differently abled and LGBTQ+.

Katarzyna Mazur-Hofsaess met with leadership from two of the EIGs in December 2022 and was impressed by the passion, drive and grassroots support for the EIGs within the organisation.

The 2022 Gallup global employee survey results were shared with the Committee. These results, which allow Smith+Nephew to benchmark against similar companies in our industry, showed a strong employee response rate of 88%. The Committee was pleased to see that the survey highlighted overall strengths in employee connection to the purpose of Life Unlimited and an overall upward trend of our results compared with last year.

For specific issues where employees may not feel comfortable articulating their views, we have a whistle-blowing policy and confidential line, as discussed above.

#### Employees

The Board proactively support and further reinforce the Purpose of Life Unlimited and culture pillars of Care, Courage and Collaboration through informal board listening sessions. These sessions give the Board the opportunity to hear directly from employees and understand thoughts and perspectives on a number of topics in connection with our purpose and culture.

Marc Owen hosted Board listening sessions for over 80 of our employees in the Americas at our Memphis manufacturing sites in January 2022 where topics discussed included Talent, IDE strategy, linking strategy and Purpose within the Company, and sustainability initiatives and the Company's impact on society and local communities.

Employees provided further background on the Company's approach to attracting, retaining and developing talent and the implementation of IDE strategy. The employee team mission to add value and be part of the solution was a message which came through clearly from those sessions and employees outlined the various recognition programmes in place. New employee induction and training were highlighted as a key priority which will form part of the Committee's continued monitoring and follow up with management in 2023.

![img-0.jpeg](img-0.jpeg)

'In our session with EIG leaders in particular, I was struck by the strength of internal support for grassroots employee initiated IDE groups, programmes and events. My dialogue with EIG programme leaders has been a true inspiration - I was impressed by their commitment to Smith+Nephew and conviction that the EIGs make a positive impact on the culture of the Company.'

**Katarzyna Mazur-Hofsaess**

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# Board Visits

**The site visit programmes to Memphis and Hull focused on strategic and operational capabilities and initiatives and sought to highlight areas of interest aligned with key priorities for the Board, including core business strategy, value creation opportunities, culture and workforce, operational transformation and ESG and stakeholder considerations in key projects.**

In Memphis, Board members started the visit with a tour of the Brooks Road manufacturing site to review the strategic and operational developments and improvements in progress as part of the 12-point plan and operational transformation.

The morning began with an employee-led wellness session including exercises and movement to start the day. The Board then toured the manufacturing site, experiencing 3D printing capabilities and manufacturing facilities at the Brooks Road site. Board members visited the Power of One Robotics and Real Intelligence platform tour hosted by cross functional teams from Recon, Robotics and Trauma in our “Ox Truck” which tours the US. The Board also attended three “innovation rooms” which showcased the pipeline for future procedural innovation and product development which were hosted by Marketing, R&D and other functional leads. Bob White attended the Appling Road facility and reported back to the Board on the improvements in supply chain and operational efficiency supporting increased completion of sets and inventory turn.

“It was important for Board members to visit, and for some to return, to our Memphis hub in 2022 given the Strategy for Growth focus on fixing Orthopaedics and improving trading margin through productivity and supply chain resilience. It was also gratifying to engage with our Memphis workforce across manufacturing, marketing, R&D and functional teams to hear the passion, enthusiasm and pride in innovation and the business more generally.”

**Roberto Quarta**

Board members Rick Medlock and Jo Hallas visited the Hull site and attended a session on our AWM Global Strategy led by our Marketing, Supply Chain and Operations teams based in the UK. This was followed by a tour of the Hull site where Board members were able to see our manufacturing operations in action, including our ALLEVYN® production and assembly capabilities. The AWM R&D team presented on our product pipeline and innovation which was followed by a product demonstration of a range of AWM products.

Our Board members engaged with our Hull Site Leadership during lunch and had an informal employee engagement session with various groups of employees including those undertaking apprenticeships with S+N and top talent.

Board members also attended in depth sessions which provided a view of future opportunities for value creation, including a presentation on our new site in Melton and our AWM strategic response to supply chain resilience. Both of these sessions were framed to provide the Board with an overview of the impact of these projects on key stakeholders including employees, suppliers, customers, regulators, government, investors, local communities and the environment.

“The presentations from the teams were thoughtful and focused on Board priorities. Having joined the Board earlier this year, the Hull factory tour and the product demonstrations were essential for understanding more about the business. The opportunity to meet local leadership and employees at the site was invaluable in providing additional insight on the company’s culture and employee engagement.”

**Jo Hallas**

“Having joined the Board at the start of the pandemic, the Hull site visit was incredibly worthwhile to learn more about our UK AWM manufacturing capabilities and see our products in action. We were impressed by the knowledge, energy and enthusiasm of the teams for our business.”

**Rick Medlock**

![img-1.jpeg](img-1.jpeg)

![img-2.jpeg](img-2.jpeg)

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# Engaging with stakeholders

The Board understands the importance of ensuring that the views and interests of all stakeholders are considered in the delivery and oversight of the Company's strategy and culture.

Although members of the Board engage directly with stakeholders as part of site visits or employee engagement meetings,

engagement with stakeholders mostly takes place at an operational level and the Board forms its views through reports and information presented to it by management. Management are asked to outline and present the potential impacts on stakeholders to the Board where appropriate.

## Employees

» 48 People

» 108 Compliance & Culture Committee

**Our employees are crucial to the success of the business and many of the key decisions made by the Board have an impact on them. It is important for us to understand the employee perspective and take their views into account in our decision making.**

The Board proactively support and further reinforce the purpose of Life Unlimited and culture pillars of Care, Collaboration and Courage through informal board listening sessions. These sessions give the Board the opportunity to hear directly from employees and understand thoughts and perspectives on a number of topics in connection with our purpose and culture.

Marc Owen hosted three Board listening sessions for over 80 of our employees in the Americas at our Memphis manufacturing sites on 18 January (Brooks Road) and 19 January (Holmes Road) where topics discussed included Talent, Inclusion, Diversity and Equity (IDE) strategy, linking strategy and purpose within the Company, and sustainability initiatives and the Company's impact on society and local communities. Employees provided further background on the Company's approach to attracting, retaining and developing talent and the implementation of IDE strategy and the ways in which the company is advancing inclusion, diversity and equity, wellbeing and a purpose-driven culture of belonging.

The Board heard about the various recognition programmes, employee engagement and the steps taken by site leadership and people managers to connect teams to the purpose of Life Unlimited. Visibility of leaders was a topic that had previously been raised and employees provided feedback that this was now being addressed at the sites in response to comments received on previous sessions. Areas of opportunity identified were to optimise and utilise engagement team and EIGs to support employees, improve communication from management on links to strategy and purpose, development opportunities and improvement on change management.

### Areas of interest

- Engagement with purpose of Life Unlimited and our culture pillars of Care, Collaboration and Courage.
- Talent, retention and development.
- Employee wellbeing and cost of living.
- Leadership and succession planning.
- Diversity, Inclusion and Equity.
- Innovation.
- Society and the environment.
- Strategy.
- Customers.

### How we engage

- Updates on leadership and talent development, succession planning and inclusion, diversity and equity are provided at Compliance & Culture Committee meetings.
- The Board meets with employees on-site visits, or virtually.
- Board/employee listening sessions.
- The Board discusses results and next steps of annual Gallup survey.

### 2022 Highlights

- The Board focused on the impact of localised Covid lockdowns on employees' safety and wellbeing (eg in Shanghai), with the Culture and Compliance Committee receiving reports on the implementation of action plans to support employees.
- On 14 June 2022, Angie Risley and Katarzyna Mazur-Hofsaess held a listening session with EMEA Commercial team members which centred on a number of key topics: (i) Leadership inspiration and trust; (ii) Employee engagement where employees shared examples of how people managers are working to engage and provide development opportunities, with employees sharing positive career development stories and experiences; and (iii) Strengths and areas for improvement. Issues were also raised to the Board regarding operational and supply chain challenges. Positive comments were provided supporting the KPI driven cultural step-change within the Company following the arrival of Deepak Nath as CEO in April 2022.
- The September Board meeting incorporated a visit to our offices in Memphis, where the Board met with various employee groups. See page 111 for further details.
- On 1 December 2022, Katarzyna Mazur-Hofsaess hosted a listening session with leaders of three of the EIGs (Empower, Unity and the S+N Global female employee network, GAIN).
- The Board were updated on the activities of our Employee Interest Groups, particularly relating to diversity, mental health and volunteering programmes.
- On 22 December 2022, Angie Risley chaired a listening session with UK employees to discuss highlights of 2022, areas for focus in 2023 and an overview of executive remuneration with an opportunity for questions and comments.

### 2023 Actions

- Further Board/employee listening sessions planned for site visits.
- Monitoring of management actions with regard to talent pipeline, leadership and succession.
- Further review of culture, inclusion and diversity initiatives with a focus on monitoring the development of EIGs within the organisation.

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# Investors

24th Shareholder information

Our investors are the owners of our business and it is important to understand investor perspective and approach on strategy, performance and governance.

In 2022, the Board has engaged with a number of investors, groups and teams covering a wide range of topics of interest including strategy and operations, supply, governance, succession planning and ESG matters. Following the appointment of Deepak Nath as CEO in April 2022 and the subsequent development and implementation of the 12-point plan aligned with the Strategy for Growth, investors wanted to understand from the Board their impressions on how the new CEO was settling into role. The Board engaged with a number of investors to provide further context on Board oversight and governance around the onboarding of the new CEO and scrutiny relating to the plans for the Company and the 12-point plan.

Another key topic of interest in 2022 was Board succession planning. Upon coming into role in September 2022, Marc Owen our Senior Independent Director engaged with investors on the chair search process and outlined the 3 key criteria the Board were looking for in a new Chair being a proven track record of shareholder value, strong UK corporate governance experience and experience of developing senior executives either whilst in a CEO or Chair role. Investors indicated that they appreciated the dialogue and these characteristics seemed to resonate with the Company's investors, shaping the search and final selection and appointment of Rupert Soames as Chair Designate.

The Board continues to see strong interest from our shareholders in ESG and sustainability matters and has engaged with a number of specialist investor teams who focus on ESG and sustainability. These investor interactions help the Board to frame the approach to ESG strategy and the issues which have importance to investors, enabling the Board and management to further evaluate how we report on the impact of sustainability on our business to ensure we are providing investors with clear communication in this area.

Areas of interest

- Succession planning.
- Strategy.
- Performance.
- Dividend.
- Leadership.
- Remuneration.

How we engage

- The Chair and Non-Executive Directors are available to meet with investors physically or virtually on request.
- The Board receives reports on meetings taking place between investors and Board members and also reviews significant changes to the share register at each Board meeting.
- Board members receive regular copies of analyst reports.
- The Chief Executive Officer and Chief Financial Officer meet with investors.
- The Board engage with and obtain feedback and advice from their brokers on key issues of importance to the Company.
- The Board also receive presentations and regular reports from the investor relations team on external market perceptions of the Company.

2022 Highlights

- Executive Directors held 121 meetings with investors representing 46% of the Company's Share Capital.
- The Chair and Senior Independent Director met with shareholders regularly throughout the year. Their discussions focused on business and share performance and also the chair succession search. Investors were also interested in key topics such as ESG, culture and purpose of the Company, CEO and Board succession planning and Board governance more broadly.
- Our Chair of the Remuneration Committee engaged with investors regarding the approach to our 2023 Remuneration Policy and discussed issues such as addressing the cost of living crisis and ESG metrics related to incentive plans and compensation.
- The Company continued to pay dividends and undertake share buybacks to shareholders in line with our strategy and capital allocation policy (see pages 19 and 20 for further details).
- MSCI upgraded the Company's ESG rating from BBB to A in 2022.

2023 Actions

- The Board will continue to be available to meet with shareholders. Please contact the Company Secretary, if you have matters you wish to raise with the Non-Executive team.
- The Annual General Meeting will be held in person in our auditorium at our headquarters in Watford enabling shareholders to attend, vote and ask questions in person to our Chair, CEO, CFO and the Chairs of each of our Board Committees.

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# Customers and suppliers

109 Compliance & Culture Committee

Our Strategy for Growth, 12-point plan and our Commitments are focused on creating value by delivering for customers.

The better we understand the needs of our customers, the better we are able to serve them and this helps to grow our business. Working in partnership with our suppliers ensures we have the right resources to support this growth.

Our customers are increasingly focused on ensuring that ESG and sustainability are taken into account in our decision making aligned with their own policies and procedures.

Areas of interest

- Acting in partnership together, supporting their needs and responding to their requirements.
- Acting ethically and fairly.
- Ensuring product quality, compliant with regulations.
- Prompt and fair payment.

How we engage

- Updates on product quality, regulatory matters and complaints.
- Updates on ethical and compliance matters and complaints.
- The Board receives regular updates on supplier and customer relationships.

2022 Highlights

- The Board has been kept updated of the supply chain issues affecting the Company and the Orthopaedics franchise in particular and have been actively engaged with management to resolve these issues in alignment with 12-point plan initiatives.
- The Compliance & Culture Committee received regular reports on the challenges and impact of the transition to EU MDR throughout 2022.
- In response to customer need, a revision knee application was launched on our robotics platform in 2022.
- Management has reported to the Board on the importance of sustainability matters to our customers and in turn how we engage with our suppliers to ensure they share our view on sustainability matters.
- The Board recognises that supply chain resilience is critical for the success of the Group and in evaluating the recent decision to move to Melton took into account the following: employees; shareholders; sustainability requirements; customers; suppliers; regulators; and governments.
- Post-pandemic there are a number of additional requirements which make it challenging for Board members to accompany our sales representatives in the field. The Board will seek to find alternative ways to understand more on the customer perspective moving forward.

2023 Actions

- The 2023 Board plan provides further opportunities for the Board to hear from external speakers.
- Given the additional challenges post-pandemic in accompanying sales representatives in the field, we will look at alternative ways to understand more on the customer perspective.

![img-3.jpeg](img-3.jpeg)

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# Governments and regulators

47 Quality & Regulatory

We are subject to the laws and regulations of many governments and regulators across the world and understanding their requirements is important for us to ensure not only product safety and compliance with relevant legislation, but also in order to implement our Strategy for Growth and our initiatives under our 12-point plan.

Areas of interest

- Product safety.
- Compliance with local legal and regulatory requirements.
- Competition issues.
- Social and economic concerns.
- Investment and innovation in local communities.
- Understanding how the Company's business impacts local communities and global business.

How we engage

- Management is responsible for ensuring compliance with applicable laws and regulations. Direct engagement between the Board and our regulators is therefore not always appropriate.
- Updates on product quality, regulatory matters and complaints at every meeting of the Compliance & Culture Committee.
- Updates on ethical and compliance matters, and complaints at every meeting of the Compliance & Culture Committee.
- The Chief Executive Officer meets with UK government and regulators.

2022 Highlights

- The Compliance & Culture Committee received regular reports from Mizanu Kebede, our Chief Quality & Regulatory Affairs Officer, on the results of FDA inspections at our manufacturing facilities.
- The Compliance & Culture Committee also received reports on the enhancements being made to the data privacy programme to take into account the fast paced regulatory changes relating to data privacy legislation and the roadmap relating to these changes.
- As part of the proposal for the new Melton site, the Board received a report on the terms of engagement with the UK central and local government with regard to the proposed site and the communications plan to ensure stakeholder views had been considered.

2023 Actions

- The Board and the Compliance & Culture Committee will continue to maintain oversight of all matters pertaining to the Company's relationship with governments and regulators across the world.

Further information about our relationship with other stakeholders, including the local communities in which we operate and our impact on the environments and the impact of climate change on our business, can be found in the Sustainability Report and on pages 56-68. The Compliance & Culture Committee regularly received updates on our sustainability programme and our progress towards the achievement of our 2030 sustainability goals.

The Directors' Report, prepared in accordance with the requirements of the Companies Act 2006 and the UK Listing Authority's Listing Rules comprising pages IFC-115 and 240-IBC was approved by the Board on 21 February 2023.

Helen Barraclough
Company Secretary

The Strategic Report comprising pages IFC-81 was approved by the Board on 21 February 2023.

Deepak Nath
Chief Executive

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Remuneration

# Directors' Remuneration report

Angie Risley
Chair of the Remuneration Committee

![img-4.jpeg](img-4.jpeg)

Membership*

|  | Member from | Meetings attended |
| --- | --- | --- |
| Angie Risley (Chair) | September 2017 | 8/8 |
| Robin Freestone 1 | September 2015 | 7/7 |
| Roberto Quarta 2 | April 2014 | 7/8 |
| Bob White | July 2020 | 8/8 |

The Committee's role

The Committee's role is to ensure that our Remuneration Policy and practices are aligned to the business strategy and promotes long-term sustainable success. We make sure the Remuneration of our Executive Officers is aligned to the Company's purpose and values and is clearly linked to the successful delivery of the 12-point plan going forward.

Looking forward - Remuneration Committee's focus for 2023

During 2023, the Remuneration Committee intends to:

- Determine the appropriate ESG metrics to introduce into our Performance Share Programme.
- Continue to focus on key remuneration challenges faced by our employees.
- Appoint a new advisor to replace Deloitte who have been appointed our Auditors from 2024.

Dear Shareholder

2022 has been a challenging year for our employees given the macroeconomic environment. One of the key focus areas of the Remuneration Committee (the "Committee") this year has therefore been on remuneration and wellness issues across the Group. Additionally, given our current Remuneration Policy (the "Policy"), which was originally approved by shareholders at the 2020 Annual General Meeting, will shortly expire we have reviewed and will present our new Policy to shareholders for approval at our 2023 Annual General Meeting.

We also welcomed Deepak Nath to the Company as our new CEO in April 2022. Since joining the Company, Deepak has made assessments of the opportunities and challenges facing the Company and has launched his 12-point plan to deliver and accelerate the Company's potential for growth. You can read more about the 12-point plan on pages 8-10.

Broader employee experience

Although this report deals primarily with the remuneration of our Directors, much of the Committee's focus during the past year has been on remuneration issues across the wider workforce during what has been a particularly challenging year for so many of our people. In December, I chaired a Board listening session with some of our employees from our UK teams to explain our remuneration policy, in particular how it aligns to the Company's purpose, values and delivery of the Company's long-term strategy. We also discussed the fall in disposable incomes.

In response to the current cost of living crisis, the Company felt it was important to undertake an off-cycle salary review

for employees. The 2.5% increase was determined by undertaking a thorough review of external data of inflation rates in the markets in which we operate and was applied to employees below senior management level in the markets where the gap between their 2022 annual pay increase and the rate of inflation was above a certain level.

We review annually the gender pay ratio and we continue to make positive progress. The Board and the Committee continue to monitor the pay arrangements for the wider workforce throughout the year to ensure our people are paid fairly and equitably for the work they do.

More broadly, under Deepak's leadership, our culture of Care, Courage and Collaboration continues to be strengthened and embedded by focusing on three key areas in 2022:

- Introduction of our Commitments - aligned to each culture pillar along with our People Leader Hub to clearly define the specific behaviours and expectations to deliver against our strategy.
- Global wellness - increase employee engagement and productivity through wellbeing programs, enhanced employee assistance programmes and tools to support managers in increasing their teams' overall wellbeing. Examples of events/programmes held include Nutrition Awareness month and Mental Health Awareness month.
- Expansion to 10 Employee Inclusion Groups with 3,000+ members globally and the training of over 2,000 managers to drive inclusion in our interviewing and hiring practices.

You can read more about these initiatives together with our new Commitments on pages 48-53.

1 Robin Freestone stepped down as a member of the Committee with effect from 30 September 2022.

2 Due to prior commitments, Roberto Quarta was not in attendance at the July 2022 meeting.

3 These non-IFRS financial measures are explained and reconciled to the most directly comparable financial measures prepared in accordance with IFRS on pages 236-240.

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## ESG and our Incentive Plans

The Committee recognises that ESG performance forms an important part of Smith+Nephew's short-term and long-term strategic priorities.

As disclosed last year, we took the decision to allocate a minimum of 5% of the performance measures in the 2022 Annual Bonus Plan to ESG and this remains in place for our 2023 Plan.

For long-term incentives, a suitable ESG metric is still under development and the intention is that an ESG objective will be introduced for the awards granted under the Performance Share Programme in 2024.

## Review of 2022 Performance

In 2022 the Group delivered revenue growth in line with its guidance issued in May 2022, but trading profit margin was below guidance. Revenue was $5,215 million, up 0.1% on a reported basis and 4.7% on an underlying basis.$^{3}$ Operating profit was $450 million, and the trading profit$^{3}$ was $901 million with a trading profit margin$^{3}$ of 17.3% reflecting higher input inflation.

Good progress was made across 2022 and we ended the year in a much stronger position than we started. We continued to outperform in Sports Medicine & ENT and Advanced Wound Management, which account for around 60% of Group sales, and even though we are early in our work

to fix Orthopaedics, growth improved here too. All three franchises contributed to the 6.8% underlying revenue growth in the fourth quarter. However, we will continue to face macroeconomic headwinds in 2023. Information on operational improvements made during the year can be found on pages 8-11.

## Remuneration Outcomes for 2022

### Annual Bonus Plan

Performance against the financial targets under the Annual Bonus Plan was therefore above target for Revenue but below threshold for trading margin, resulting in an aggregated payout of 53% of target in respect of the financial objectives.

The Remuneration Committee reviewed the performance of the Executive Directors against their individual business objectives. We concluded both Deepak and Anne-Françoise achieved against their individual business objectives in terms of what they did and exceeded in terms of how they performed and they consequently received an on target payout in relation to this element of their bonus. Our assessment in relation to Roland Diggelmann, our former CEO, was that he had partially achieved his objectives during the first quarter of 2022.

These ratings combined with performance against the financial objectives resulted in an overall bonus amounting to 63% of target for Deepak and Anne-Françoise.

Payouts to both Deepak and Roland were appropriately pro-rated to reflect their period of employment during 2022.

We also considered whether these outcomes fairly represented the performance of the Company and the Executive Directors in 2022. We acknowledged that during 2022, the share price had slightly fallen, that the Company had delivered a mixed performance albeit ending the year in a much stronger position than we started and that there had been no reputational risk issues. We therefore determined that these outcomes were a fair representation of performance and there was no need to apply discretion to these formulaic outcomes.

### Performance Share Programme

Similarly, the Remuneration Committee reviewed performance over the past three years against the targets determined in 2020 for the Performance Share Programme and determined that these awards should vest at 0%. This reflects performance against the targets over the three-year performance period since 1 January 2020. Deepak Nath was not employed by the Company at the time the awards were granted under the 2020 Performance Share Programme and therefore did not receive an award.

| Measures in our variable pay plans |  |
| --- | --- |
| Performance measures in Annual Bonus Plan for 2023 |  |
| Revenue (40%) | Top-line growth is essential for continued progress and long-term value creation. |
| Trading margin (40%) | Trading margin focuses on profit. |
| Business objectives (15%) | Individual business objectives linked to the strategic imperatives to ensure alignment across the Company. |
| ESG objectives (5%) | Doing the right thing with regard to our employees, the environment and other stakeholders ensures a sustainable business for the future. |
| Performance measures in our Performance Share Programme for 2023 |  |
| Revenue growth (25%) | Top-line growth leading to value creation is a key goal for Smith+Nephew over the next three to five years. Earning market share is important to create a competitive advantage for Smith+Nephew in driving growth. |
| Return on invested capital (25%) | Provides focus on long-term efficiency and profitability. Bottom-line performance provides balance to revenue measure. Important measure for our investors. |
| Cumulative free cash flow (25%) | Essential to fund investment, pay down debt and take advantage of market opportunities. Important measure for our investors and forms part of management conversations with the market. |
| TSR performance against an Index (25%) | Total Shareholder Return (TSR) aligns Executive reward to the shareholder experience. An indexed approach avoids an anomalous result which can arise if there is a small number of extreme outliers in the Group. |

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## Remuneration continued

### Directors' Remuneration report continued

#### Proposed Remuneration Policy

We are required at the 2023 Annual General Meeting to seek the standard triennial shareholder approval for a new Remuneration Policy (the "new Policy"). Ahead of this vote, the Committee has been carefully considering whether existing remuneration arrangements, as set out in our current Policy, are consistent with delivery of the 12-point plan. The Committee has concluded that no immediate, substantive changes should be made to the Policy. However, we intend to keep this issue under careful review during 2023.

The Committee additionally took the opportunity to review the current Policy against the UK Corporate Governance Code (the "Code"), shareholder guidance and general market practice. Following that review, a few minor changes are proposed to the new Policy, details of which are summarised below. Any use of the discretions available to the Committee in this new Policy would be fully explained and justified in the relevant Remuneration Report and, where appropriate, discussed in advance with major shareholders.

- **Pension:** The Executive Director pension arrangements have been updated and are compliant with the Code.
- **Incentive plans:** Consistent with emerging market practice, the new Policy contains scope for the Committee to set and measure bonus targets other than on an annual basis. Use of this option will be reserved for unusual circumstances, for example where there is exceptional economic volatility (as in the recent Covid affected period) and a consequent limited visibility to set robust 12-month targets. In line with the Investment Association guidance, the new Policy also provides for appropriate discretion so that the Committee may ensure incentive outturns properly

reflect the performance of the executives and their contribution to overall corporate performance, the experience of shareholders in terms of value creation, the experience of wider stakeholders and the general market environment. Limitations on the use of this discretion are fully outlined in the Annual Bonus Plan and Performance Share Programme sections of the Policy.

- **Shareholding guidelines:** Whilst the default position in the new Policy remains for a post-employment shareholding guideline to apply for two years after an Executive Director ceases employment, there is discretion for the Committee to, exceptionally, adjust or waive the guideline in circumstances where the Board believes its application would be inappropriate (e.g. in the event of death).
- **Recruitment arrangements:** Consistent with market practice, the new Policy contains flexibility for the reimbursement of legal or other professional fees approved by the Committee incurred by an individual in relation to their appointment. The Committee will also have the flexibility to determine whether a new Executive Director should be subject to a different set of criteria for annual and/or long-term incentive performance measures (within the existing parameters for these plans in this new Policy) during the first twelve months following appointment.
- **Pay for Loss of Office:** Consistent with market practice, the new Policy contains flexibility to make payments to a departing Director in discharge of an existing legal obligation or by way of settlement of any claim arising in connection with cessation of employment. Minor amendments also permit the Committee to determine the form and basis of calculation of a departing Director's annual bonus in

a manner appropriate to the particular circumstances (albeit any such bonus will continue to be time pro-rated and subject to performance).

- **Non-Executive Director (NED) fees:** Where a NED takes on additional responsibilities that involve additional time commitment, consistent with market practice, the new Policy will contain the flexibility to pay an associated supplementary fee. The new Policy also clarifies the flexibility to approve additional benefits (e.g. liability insurance) and to reimburse business expenses to the Chair and NEDs in connection with the performance of their duties. In addition, the new Policy also provides flexibility for fees to be delivered either in a mixture of cash and shares or wholly in cash with an accompanying commitment from the Chair or NED to separately purchase the required number of shares.

I would like to thank our shareholders for their support and engagement during the year.

**Angie Risley**
Chair of the Remuneration Committee

#### 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), sections 420 to 422 of the Companies Act 2006 and The Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations), The Companies (Directors' Remuneration Policy and Directors' Remuneration Report) Regulations 2019 and The Companies (Miscellaneous Reporting) Regulations 2018. The Report also meets the relevant requirements of the Financial Conduct Authority (FCA) Listing Rules.

Pages 129-145 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 26 April 2023. The Implementation Report explains how the Remuneration Policy was implemented during 2022. The following sections have been audited by KPMG: The Single Figure Tables on Remuneration including related notes (pages 130-139); details of awards made under the Performance Share Programme (pages 135-138); Summary of Scheme Interests during the year (page 138); Payments to former Directors (page 135); Payments made to other past Directors (page 139); Directors' interests in ordinary shares (page 140) and Senior Management Remuneration (page 145).

This Policy Report describes our Remuneration Policy as it relates to the Directors of the Company. All payments we make in relation to Directors of the Company will be in accordance with this Remuneration Policy. The Policy will be put to shareholders' vote at the Annual General Meeting on 26 April 2023.

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# Directors' remuneration policy

## Compliance with the UK Corporate Governance Code

The new Remuneration Policy has been developed taking into account the following principles set out in Provision 40 of the Code:

- **Simple and clear:** Our remuneration structure is straightforward and transparent with Executive Directors' variable pay consisting of an annual bonus and a single long-term incentive plan.
- **Aligned to culture, purpose and strategy:** The remuneration structure has been designed to support our culture and business purpose with particular attention being paid to remuneration throughout the organisation to ensure that arrangements are appropriate in the context of our approach to reward for the wider workforce. Performance measures used in the incentive plans are aligned with key strategic objectives and the principle of long-term sustainable value creation.
- **Predictability:** Incentive awards are capped so that the maximum potential award under each plan is transparent. The charts on page 125 provide an illustration of the potential total reward opportunity for the Executive Directors.
- **Proportionality and mitigating risk:** Our variable remuneration arrangements are designed to provide a fair and proportionate link between Group performance and reward whilst mitigating risk where appropriate. The Committee has overriding discretion that allows it to adjust formulaic annual bonus or PSP outcomes so as to prevent disproportionate results and Policy provisions allow for the application of malus and/or clawback in specific circumstances. Additionally, there is a clear link between executive remuneration and the longer-term performance of the Group through a combination of bonus deferral into shares, five-year release periods for PSP awards and stretching shareholding requirements that apply during and post employment.

## Changes to policy

The new Policy contains no substantive changes to the 2020 Remuneration Policy. The handful of minor changes proposed in the new Policy are summarised on page 118.

In designing the directors' remuneration policy set out on pages 120-128 (the "Policy"), the Smith & Nephew plc Remuneration Committee (the "Committee") followed a robust process which included discussions on the content of the Policy at several Committee meetings and engagement with our shareholders.

In order to avoid any conflicts of interest, the Committee is composed entirely of independent Non-Executive Directors. The Committee considered input from management, while ensuring that conflicts of interest were suitably mitigated, and our independent advisors, and sought the views of Smith & Nephew plc (the Company) major shareholders and other stakeholders, including employees. If approved by shareholders, the Policy will take effect from the date of that approval.

## Proposed implementation of new Policy in 2023

### Base salary

- 2022 salaries: CEO $1,475,000; CFO £615,960.
- 2023 salaries: CEO $1,526,625; CFO £637,519 (3.5% increase). For context, the average 2023 increases for our US and UK workforce (inclusive of a 2.5% off-cycle increase) are 6.5% and 6% respectively.

### Pension

- CEO: 7.5% of capped salary (aligned with US employees).
- CFO: 12% of salary (aligned with UK employees).

### Annual Bonus

- 2023 opportunity for CEO and CFO: 215% of salary (unchanged from 2022).
- 50% paid in cash, 50% deferred in shares for three years.
- Performance measures: 40% revenue growth, 40% trading profit margin, 20% business objectives including ESG metrics (unchanged from 2022).

### Performance Share Programme

- 2023 award for CEO and CFO: 275% of salary (unchanged from 2022).
- Three-year performance period plus two-year holding period.
- Performance measures: 25% relative TSR, 25% ROIC, 25% revenue growth, 25% free cash flow (unchanged from 2022).

### Shareholding guideline

- Whilst in employment, build up and maintain shareholding worth at least 300%/200% of salary for CEO/CFO.
- After ceasing employment, remain compliant with their 'in employment' guideline for two years after stepping down as Director.

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## Remuneration continued

### Directors' remuneration policy continued

#### Future policy table - Executive Directors

##### Base salary and benefits

##### Base salary

Core element of remuneration, paid for doing the expected day-to-day job to recruit and retain Executive Directors of the calibre required to deliver the Company's strategy.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| Salaries are normally reviewed annually with any increase usually applying from 1 April. Salary levels and increases take into account: - scope and responsibility of position; - skill/experience and performance of the individual Executive Director; - general economic conditions in the relevant geographical market; - average increases awarded across the Company, with particular regard to increases in the market in which the Executive Director is based; and - market movements within a peer group of similarly sized listed companies. | While there is no maximum salary level, any increases will normally not exceed the typical increase for the wider employee population within the relevant geographic area. Higher increases may be made under certain circumstances at the Committee's discretion. For example, this may include: - increase in the scope and/or responsibility of the individual's role; and - development of the individual within the role. A full explanation will be provided in the Implementation Report should higher increases be approved in exceptional cases. In addition, where an Executive Director has been appointed to the Board at a lower than typical salary, larger increases may be awarded to move them closer to market practice as their experience develops. | Performance in the prior year is one of the factors taken into account and poor performance is likely to lead to a zero salary increase. |

##### Pension and payment in lieu of pension

Provide Executive Directors with an allowance for retirement planning to recruit and retain Executive Directors of the calibre required to deliver the Company's strategy.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| Executive Directors receive a cash allowance in lieu of membership of a Company-run pension scheme. In jurisdictions where the local law requires employees to participate in a Company-run pension scheme, Executive Directors participate in the local pension scheme. Base salary is the only component of remuneration which is pensionable. | The maximum pension allowance for an Executive Director will be no more than the percentage of salary contribution paid in respect of the majority of our UK workforce (currently 12% of salary) unless the percentage of salary contribution paid in respect of the majority of the workforce in the Executive Director's home country or the country in which the Executive Director is based is lower, in which case that lower percentage of salary contribution would usually be offered. | None. |

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## Benefits

Provide Executive Directors with a market competitive benefits package to recruit and retain Executive Directors of the calibre required to deliver the Company's strategy.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| A wide range of benefits may be provided depending on the benefits provided for comparable roles in the location in which the Executive Director is based. These benefits will include, as a minimum: healthcare cover, life assurance, long-term disability, annual medical examinations, company car or car allowance. The Committee retains the discretion to provide additional benefits, where necessary or relevant in the context of the Executive Director's location, or, in connection with an Executive Director's recruitment, the country from which the Executive Director is recruited. Where applicable, relocation costs may be provided in-line with the Company's relocation policy for senior executives, which may include, amongst other items: removal costs, assistance with accommodation, living expenses for self and family and financial, tax and/or legal consultancy advice. In some cases, such payments may be grossed up. | While no maximum level of benefits is prescribed, they are set at an appropriate market competitive level, taking into account a number of factors, which may include: - the jurisdiction in which the individual is based. - the level of benefits provided for other employees within the Company. - market practice for comparable roles within appropriate pay comparators. The actual amount payable will depend on the cost of providing such benefits to an employee in the location at which the Executive Director is based. The Committee regularly reviews the benefit policy and benefit levels. | None. |

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## Remuneration continued

### Directors' remuneration policy continued

#### All-employee arrangements

##### All-employee share plans

To enable Executive Directors to participate in all-employee share plans on a similar basis as other employees.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| ShareSave Plans are operated in the UK and 31 other countries internationally. In the US, an Employee Stock Purchase Plan is operated. These plans enable employees to save on a regular basis and then buy shares in the Company. Executive Directors are able to participate in such plans on a similar basis to other employees, depending on where they are located. | Executive Directors may currently invest up to £500 per month in the UK ShareSave Plan, in-line with UK participants. The Committee may exercise its discretion to increase this amount up to the maximum permitted by HM Revenue & Customs. Similar limits will apply in different locations. | None. |

#### Annual incentives

##### Annual Bonus Plan

Incentivises delivery of the business plan on an annual basis. Rewards performance against key performance indicators which are critical to the delivery of our business strategy.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| The Annual Bonus Plan is designed to reward performance over the year against financial and business objectives. The Committee determines pay out levels based on the extent to which performance against these objectives has been achieved. The Committee retains discretion, in exceptional circumstances, to pay bonuses in respect of the half year and/or full year. The Committee has full discretion to adjust outcomes under the Annual Bonus Plan where: (i) the occurrence of certain events would unfairly advantage or disadvantage participants, in the reasonable opinion of the Committee and/or (ii) the amount that a participant would/could receive under an award would result in the participant receiving an amount which the Committee considers cannot be justified or which the Committee considers to unfairly disadvantage or advantage a participant. In exercising this discretion, the Committee may consider all circumstances, including (but not limited to): the financial performance of the Company; any changes in the Company's share price; and the performance, conduct and contribution of the participant. Malus and clawback provisions apply, as detailed in the notes to this table. Normally, half of the award is paid in cash after the end of the performance year and half is deferred into an award of shares under the Deferred Share Bonus Plan (DBP), which normally vests after three years. The Committee has full discretion to authorise the payment of dividend equivalent payments on DBP awards to the extent they vest. | The maximum opportunity is 215% of base salary. 50% of maximum is payable for on-target performance. Up to 15% of maximum is payable for threshold performance. | The Committee will determine the appropriate performance measures for each financial year, in order to ensure that the Annual Bonus Plan focuses on key business priorities for the Company. Typically, 80% of the annual bonus will be based on financial performance measures. The remainder will usually be based on business objectives linked to key areas of strategic focus. The Committee retains the discretion to adjust the relative weightings of the financial and strategic components and to adopt any performance measure that is relevant to the Company. Under whatever measures are chosen, the Committee will set appropriately challenging maximum performance targets and additionally, where appropriate, targets for threshold and/or on-target performance. In doing so, they will take into account a number of internal and external reference points, including the Company's key strategic objectives. The Committee may amend the performance conditions applicable to an award in accordance with the terms of the performance conditions or if events happen which cause the Committee to consider that it fails to fulfil its original purpose and would result in participants being unfairly advantaged or disadvantaged. |

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## Long-term incentives

### Performance Share Programme (PSP)

To motivate and reward performance linked to the long-term strategy and share price of the Company.

The performance measures which determine the level of vesting of the PSP awards are linked to our corporate strategy.

| How the component operates | Maximum levels of payment | Framework in which performance is assessed |
| --- | --- | --- |
| Awards are granted pursuant to the terms of the PSP. Awards are normally made in the form of conditional share awards, but may be awarded in other forms if appropriate, including nil cost options or a combination of awards. Awards usually vest after three years, subject to the achievement of stretching performance targets linked to the Company's strategy. The performance period is usually 3 years. The Committee has full discretion to adjust outcomes under the PSP where: (i) the occurrence of certain events would unfairly advantage or disadvantage participants in the reasonable opinion of the Committee; and/or (ii) the amount that a participant would/could receive under an Award would result in the participant receiving an amount which the Committee considers cannot be justified or which the Committee considers to unfairly disadvantage or advantage a participant. In exercising this discretion, the Committee may consider all circumstances, including (but not limited to): the financial performance of the Company; any changes in the Company's share price; and the performance, conduct and contribution of the participant. Participants may receive an additional number of shares (or, exceptionally, cash) equivalent to the amount of dividends payable on ordinary shares subject to the award that vest during the period up to vesting. On vesting, a number of shares are sold to cover the tax liability. The remaining shares are usually required to be held by the Executive Director for a further two year holding period. Malus and clawback provisions apply as detailed in the notes to this table. | The maximum annual opportunity is 275% of base salary. For on-target levels of performance, 50% of the award vests. For threshold levels of performance, 25% of the award vests. | The Committee aims to align the PSP performance measures with the Company's key long-term strategic objectives. In this manner, strong performance against the measures should lead to long-term sustainable value creation for our shareholders. Measures used will typically include: - Financial measures - to reflect the financial performance of our business and a direct and focused measure of Company success. - Shareholder return measures - a measure of the ultimate delivery of shareholder returns, providing direct alignment. - Strategic measures - aligned with the Company's long-term strategy. The make-up and weighting of each measure will be determined by the Committee each year to reflect the particular strategic objectives over the relevant performance period. Maximum pay-outs will only be made for significant outperformance. Under whatever performance measures are chosen, the Committee will set appropriately challenging maximum performance targets and additionally, where appropriate, targets for threshold and/or on-target performance. In doing so, they will take into account a number of internal and external reference points, including the Company's key strategic objectives. The Committee may amend the performance conditions applicable to an award in accordance with the terms of the performance conditions or if events happen which cause the Committee to consider it appropriate to do so provided that this would not result in, in the Committee's reasonable opinion, an unfair benefit to the Executive Director. |

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## Remuneration continued

### Directors' remuneration policy continued

## Notes to future policy table - Executive Directors

### Share awards

The Committee may, in the event of any variation of the Company's share capital, demerger, delisting, or other event which may affect the value of awards, adjust or amend the terms of DBP or PSP awards in accordance with the plan rules.

### Malus and clawback

At any time prior to the vesting of a PSP or DBP award or payment of a cash bonus, the Committee may determine that an unvested award or part of an award may not vest, including to zero on the occurrence of a Trigger Event (as defined below), regardless of whether or not the performance conditions have been met. At any time up to three years after the vesting of a PSP or DBP award or payment of a cash bonus, the Committee may determine that any cash bonus, vested shares, or their equivalent value in cash be returned to the Company on the occurrence of a Trigger Event.

A **Trigger Event** will occur if any of the following matters is discovered where:

- There has been a misstatement of the Company's financial results which has resulted in a material overpayment to participants, which is in the form of awards under the applicable programme or otherwise, irrespective of whether the relevant participants are at fault;
- There has been an error in determining the size of the award or to the extent to which the performance conditions have been satisfied, or erroneous or misleading data, which has resulted in the vesting of an award which would not otherwise have vested or which would otherwise have vested to a materially lesser extent;
- There has been a significant adverse change in the financial performance or reputation of the Company, including corporate failure and/or any significant loss at a general level or in respect of a global business unit or function in which a participant worked; and/or
- The Committee determines that the conduct, capability or performance of a participant or any team, business area or profit centre warrants a review.

These provisions will apply under the Global Share Plan 2023 and the Annual Bonus Plan 2023.

In addition to (and without limiting) the foregoing, the Company is intending to adopt an additional clawback policy pursuant to listing standards that have been released by the New York Stock Exchange, pursuant to the final rule adopted by the United States Securities and Exchange Commission enacting the clawback standards applying to U.S. listed companies under the Dodd-Frank Act. In accordance with this policy, the Committee or the Board is also intending to adopt policies requiring repayment of any amounts of incentive compensation from its "executive officers", which may include the Executive Directors, that was calculated erroneously based on financial statements that were required to be restated due to material noncompliance with financial reporting requirements, to the extent required under the new clawback policy.

### Legacy matters

The Committee can make remuneration payments and payments for loss of office outside of the Policy set out above where the terms of the payment were agreed (i) before the Policy came into effect, provided the terms of the payment were consistent with any applicable policy in force at the time they were agreed or the terms were agreed before the date on which the Company first obtained shareholder approval for a Directors' remuneration policy; or (ii) at a time when the relevant individual was not an Executive Director of the Company (or other person to whom the Policy set out above applies) and that, in the opinion of the Committee, the payment was not in consideration for the individual becoming an Executive Director of the Company (or such other person). This includes the exercise of any discretion available to the Committee in connection with such payments.

For these purposes, payments include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are agreed at the time the award is granted. The Policy set out above applies equally to any individual who would be required to be treated as an Executive Director under the applicable regulations. The Committee can make remuneration payments and payments for loss of office outside of the Policy set out above if such payments are required by law in a relevant country.

### Consideration of employment conditions elsewhere in the Group and differences between arrangements for Executive Directors and workforce as a whole

When setting the Policy for Director's Remuneration, the Committee discusses, and takes into account of pay arrangements and employment conditions of employees across the Group when determining the pay of Executive Directors in the following ways:

### Base salary

Increases to Executive Director base salaries will generally not exceed base salary budgets in the geography in which the Executive Director is based, although the Committee will also have oversight of base salary budgets across the Company more generally when making the decision.

Recent off-cycle base salary increase adjustments made by the Company in 2022 to its employees in certain geographies to respond to inflation and cost of living challenges were limited to employees within the company three tiers below senior management level and were not awarded to Executive Directors.

### Pension contributions and payments in lieu of a pension

A range of different pension arrangements operate across the Group depending on location and/or length of service. Executive Directors either participate in pension arrangements relevant to wider workforce in their local market or receive a cash allowance payable in lieu of a pension at a percentage of base salary in line with the wider workforce in the geography in which they are based.

### Benefits

Benefit packages vary across the world depending on local market practice. Executive Directors receive a range of benefits in line with the standard executive benefits package available to the wider executive workforce in the geography in which they are based.

### Annual Bonus Plan

Nearly all employees have performance-based pay, primarily in form of the Annual Bonus. Employees at different levels throughout the Group participate in Annual Bonus Plans with different payment outcomes. The annual performance objectives are cascaded down to all employees from the objectives set at the beginning of the year for the Executive Directors and Executive

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Officers, to ensure that the performance of all employees is linked to the Company's strategy and the objectives of the Executive Directors and senior management as applicable. In 2022, Executive Officers and senior executives participated in the Annual Bonus Plan on the same basis as the Executive Directors, subject to lower limits.

### All Employee Share Plans

We operate two all-employee share plan arrangements depending on the most appropriate arrangement for different geographies. In 2022, US employees participated in the Employee Stock Purchase Plan. In 2022, UK and international employees from 31 other countries, participated in the ShareSave Plan. Executive Directors, executive officers and senior executives participated in these plans aligned to the geography in which they operate.

### Long term incentives

Executive Officers and senior executives participate in the PSP on the same basis as the Executive Directors subject to lower limits.

### Shareholding requirements

Executive Officers and senior executives who participate in the Annual Bonus Plan and the PSP are also required to build a significant shareholding in the Company.

### Corporate events

If there is a takeover of the Company, awards under the PSP and DBP will normally vest early at the time of the transaction. DBP awards will normally vest in full. The extent to which awards under the PSP vests will be determined by the Committee, taking into account, where considered to be appropriate in all the circumstances, the actual or likely achievement of the relevant performance conditions and, unless the Committee determines otherwise, the awards will be time pro-rated by reference to the proportion of the relevant performance period that has elapsed. Any post-vesting holding will normally cease to apply.

In these circumstances, the Committee reserves the discretion to treat the payment of annual bonuses for the financial year in which the takeover takes place in such manner as it considers appropriate (subject to the limit set out in the Policy table above).

If there is a demerger or other transaction that is likely to materially affect the Company's share price, the Committee may allow awards to vest and bonus to be paid early on the same basis as set out above for a takeover.

## Illustrations of the application of the Remuneration Policy 2023

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

### Chief Executive Officer

#### Current

![img-0.jpeg](img-0.jpeg)

### Chief Financial Officer

#### Current

![img-1.jpeg](img-1.jpeg)

\* + 50% share price growth ■ Fixed pay ■ Annual bonus ■ PSP

|  | Assumed performance | Assumptions used for proposed Policy |
| --- | --- | --- |
| Fixed pay | All performance scenarios | Consists of total fixed pay, including base salary and pension allowance (as at 1 April 2023) and benefits (as received during 2022). Pro-rated for Deepak Nath. |
| Variable pay | Minimum Performance | No pay out under the Annual Bonus Plan. No vesting under the PSP. |
|  | Target Performance | 50% of maximum pay out under the Annual Bonus Plan (i.e. 107.5% of salary). 50% vesting under the PSP (i.e. 137.5% of salary). |
|  | Maximum Performance | 100% of the maximum pay out under the Annual Bonus Plan (i.e. 215% of salary). 100% vesting under the PSP (i.e. 275% of salary). |
|  | Maximum performance + 50% share price growth | As Maximum Performance but this column assumes that the face value of the PSP award increases by 50% as a result of share price growth. |

PSP awards have been shown at face value with no discount rate assumptions. The charts provide illustrative values of the remuneration package in 2023. Actual outcomes may differ from those shown.

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## Remuneration continued

### Directors' remuneration policy continued

#### Policy on recruitment arrangements

Our policy on the recruitment of Executive Directors is to pay a fair remuneration package for the role being undertaken and the experience of the Executive Director appointed. In terms of base salary, we will seek to pay a salary comparable, in the opinion of the Committee, to that which would be paid for an equivalent position elsewhere. The Committee will determine a base salary in line with the Policy and having regard to the parameters set out in the Future Policy Table. Incoming Executive Directors will be entitled to pension (or cash payment in lieu of pension), benefits and incentive arrangements aligned with those set out in the Policy table above. On that basis, the aggregate annual opportunity under their incentive arrangements would not exceed 490% of base salary.

We recognise that in the event that we require a new Executive Director to relocate to take up a position with the Company, we may also pay relocation and related costs, in line with the relocation arrangements we operate across the Group. In addition, where a new Executive Director requires legal or other professional advice related to the appointment with the Company, we may agree to pay directly or reimburse the Executive Director for fees and expenses reasonably and properly incurred including the provision of advice to enable the Executive Director to understand the obligations, duties and legal and regulatory requirements of the new role.

The Committee also has the discretion to determine whether a new Executive Director should be subject to a different set of criteria for annual and/or long-term incentive performance measures during the first twelve months following appointment.

For external appointments, the Committee may award compensation for the forfeiture of remuneration awards or compensation arrangements from a previous employer. In doing so, the Committee would aim to structure the replacement awards in a like-for-like manner to the extent possible, taking into account relevant factors, including:

- the form of the forfeited awards (e.g. cash or shares);
- any performance conditions attached to them and the likelihood of these conditions being satisfied; and
- the proportion of the vesting and/or performance period remaining.

The Committee will have regard to the best interests of both Smith+Nephew and its shareholders and is conscious of the need to pay no more than is necessary, particularly when determining buy-out arrangements.

In making buy-out awards to new appointments, the Committee may grant awards under the relevant provision in the Financial Conduct Authority Listing Rules, which allows for the granting of awards specifically to facilitate, in unusual circumstances, the recruitment of an Executive Director, without seeking prior shareholder approval.

The overall approach outlined above would also apply to internal appointments, with the proviso that any commitments entered into before promotion which are inconsistent with the Policy will continue to be honoured.

#### Service contracts

We employ Executive Directors on rolling service contracts with notice periods of up to twelve months from the Company and six months from the Executive Director. On termination of the contract, we may require the Executive Director not to work their notice period and pay them (in phased instalments or as a lump sum) an amount equivalent to the base salary, contributions to a pension or equivalent savings plan (or payment in lieu thereof) and benefits they would have received if they had been required to work their notice period. The Executive Directors may become entitled to additional/alternative sums if termination occurs within 12 months of a change in control (as further described in the following section "Policy for payment for loss of office").

Directors' service contracts are available for inspection at the Company's registered office: Building 5, Croxley Park, Hatters Lane, Watford, Hertfordshire WD18 8YE, United Kingdom

#### Policy for payment for loss of office

Our usual policy regarding termination payments to departing Executive Directors is to limit severance payments to pre-established contractual terms. Where necessary to comply with the mandatory laws of the jurisdiction in which the Executive Director is resident, the Committee may authorise remuneration payments or payments for loss of office in excess of the pre-established contractual terms. In the event that the employment and/or office of an Executive Director

ends, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the Executive Director, as well as the rules of any incentive plans and the Policy. In addition, the Committee will have the discretion to make payments in discharge of an existing legal obligation (or by way of damages for breach of such obligation) or by way of settlement of any claim arising in connection with the cessation of office or employment.

Under normal circumstances (excluding termination for gross misconduct and certain other terminations for 'cause') all leavers are entitled to receive a termination payment (in phased instalments or as a lump sum) in lieu of notice equal to base salary, pension contributions (or payment in lieu of pension) and benefits. The leaver may also be paid a payment in lieu of accrued but untaken holiday leave.

Payments may also include (but are not limited to) costs associated with relocation/repatriation, the costs of legal advice, financial (including tax) advice and outplacement services in connection with cessation of office or employment.

In the event of termination in connection with a change in control of the Company, in circumstances where there is a diminution of status, a reduction in salary or benefits, a mandatory relocation or where termination results from the change in control, the payment in lieu of notice will be payable as a lump sum, the Committee will consider to what extent an annual bonus award should be made, and the leaver will receive reasonable outplacement costs.

In the event that an Executive Director dies or ceases to be an employee because of ill-health, injury, disability, redundancy, retirement with the agreement with the Company, the sale of their employing company or business out of the Group, or for any other reason for which the Committee determines that good leaver treatment is appropriate:

- They may be eligible to receive an annual bonus on a time pro-rated basis for the period of the year that they have worked.
- The annual bonus will typically be subject to business and individual performance in the same manner as for the continuing Executive Directors, and paid at the usual time. The annual bonus may be paid in

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such proportion of cash and shares and subject to such deferral arrangements as the Committee may determine. The Committee will have the discretion to take into account performance over the full financial year or up to the date of cessation of employment based on appropriate performance measures determined by the Committee in line with the Policy.

- Outstanding PSP awards will typically, unless the Committee determines otherwise, be pro-rated for the proportion of the relevant performance period that has elapsed at the time Executive Director leaves and be tested for performance at the end of the performance period, unless the Committee determines to test performance otherwise. The two-year post-vesting holding period will, unless the Committee determines otherwise, continue to be enforced. If an Executive Director dies, awards will normally vest early and only be time pro-rated if the Committee considers it appropriate. Any outstanding awards under the PSP will remain subject to the same terms and conditions (including, malus and clawback) as applied at time of grant. For participants who leave for any other reason, outstanding PSP awards will lapse in full.
- If an Executive Director leaves for any reason other than dismissal or any other reason that the Committee determines, any outstanding DBP awards will remain subject to the same terms and conditions (including malus and clawback) as applied at time of grant and vest as if the Executive Director had not left. In the event of termination in connection with a change in control of the Company or, if an Executive Director dies, any outstanding DBP awards will vest. In any other circumstances any unvested DBP awards will lapse.

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

We will supply details via an announcement to the London Stock Exchange of a departing Executive Director's termination arrangements as soon as is practicable.

## Policy on shareholding requirements

The Committee believes that one of the best ways our Executive Directors' interests can be aligned with that of shareholders is for them to hold a significant number of shares in the Company. The Chief Executive Officer is therefore expected to build a holding of Smith+Nephew shares worth three times base salary and the Chief Financial Officer is expected to build a holding of two times base salary. Executive Directors are required to retain at least 50% of the shares (after tax) vesting under Company incentive plans until this shareholding requirement has been met, recognising that differing international tax regimes affect the pace at which Executive Directors may fulfil the shareholding requirement, unless the Committee determines otherwise.

When calculating whether or not this requirement has been met, Ordinary Shares or ADRs held by the Executive Directors and their immediate family are included, as are unvested awards under the DBP (on a net-of-tax basis), but not PSP awards. Ordinarily we would expect Executive Directors to achieve their shareholding requirement within a period of five years from the date of appointment.

Executive Directors are also usually required to hold any shares vesting under the PSP for a period of two years after vesting.

The Executive Officers and senior executives who participate in the Annual Bonus Plan and PSP are also required to build a significant shareholding in the Company, extending the principle of alignment with our shareholders across the senior management team.

## Policy on post cessation shareholding

Executive Directors are usually required to retain any shareholding up to the applicable shareholding requirement (or their actual holding on departure if lower) for a period of two years after cessation of employment. This post employment holding requirement does not apply to shares purchased by an Executive Director in the market which have not been awarded as part of remuneration.

In order to reinforce this expectation, and to the extent that the shareholding requirement has not been reached, all relevant vested DBP and PSP shares will be held in a vested share plan account, which will not usually be accessible until two years post cessation of employment.

In addition, former Executive Directors will be required to seek permission to deal during this period.

The Committee retains the discretion to adjust or waive all or part of the post employment shareholding requirement in appropriate circumstances. In exercising this discretion, the Committee may consider circumstances including (but not limited to) the performance, conduct and contribution of the participant.

## Limited discretion to make minor amendments to Policy

The Committee retains the discretion to make minor amendments to the Policy as may be required or reasonably necessary for administrative reasons or to the extent required or reasonably necessary to comply with applicable laws and regulations.

## Consultation with employees relating to Executive Director remuneration

While the Committee does not directly consult with our employees as part of the process of determining executive pay, the Chair provided an overview of the compensation of Executive Officers at one of our Board Listening Sessions. No comments were raised by the employees attending that session.

## Statement of consideration of shareholder views

Angie Risley, the Committee Chair, engaged with shareholders during development of the Policy. The feedback received was presented to and discussed by the Committee and informed the final shape of the proposed Policy which is being put to the 2023 AGM.

The Committee Chair corresponded with our top twenty shareholders regarding our proposed 2023 Remuneration Policy and also offered meetings to discuss our remuneration arrangements. This included a number of shareholders who, although holding a smaller number of shares, had indicated earlier in the year that they would be interested in engaging with the Company on remuneration matters.

The Committee Chair and shareholders appreciated the engagement and the Committee took all comments received on board during its subsequent discussions and ensured further clarity was included in the narrative detailing the proposed changes to the new Policy (see page 118).

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## Remuneration continued

### Directors' remuneration policy continued

#### Future policy table - Chair and Non-Executive Directors

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

#### Annual fees

##### Basic annual fee

To attract and retain Directors by setting fees at rates comparable to what would be paid in an equivalent position elsewhere.

A proportion of the fees is usually paid in shares in the third quarter of each year in order to further align Non-Executive Directors' fees with the interests of shareholders. Where appropriate, the Chair or Non-Executive Director may be provided with an alternative option of receiving their fee wholly in cash in return for them entering into a commitment to separately purchase the required number of shares to comply with the above requirement.

##### How the component operates

Fees will be reviewed on an annual basis. In future, any increase will usually be paid in shares until 25% of the total fees is paid in shares.

Fees are set in-line with market practice for companies of a similar size and complexity.

Annual fees are set and paid in UK Sterling or US Dollars depending on the location of the Non-Executive Director. If appropriate, fees may be set and paid in alternative currencies and exchange rate fluctuation will be taken into account when determining fees to be paid in alternative currencies.

##### Maximum levels of payment

Whilst it is not usually expected to increase the fees paid to the Non-Executive Directors and the Chair by more than the increases paid to employees generally, in certain circumstances (including periodic and substantial increases in activity or time commitment), higher fees might become payable.

The total maximum aggregate fees payable to the Non-Executive Directors will not exceed the limit set out in the Company's Articles of Association.

##### Additional Fees

To compensate Non-Executive Directors for additional responsibilities such as Committee Chair or Senior Independent Director reflecting additional time involved in such roles.

##### How the component operates

A fixed fee is paid, which is reviewed annually.

##### Maximum levels of payment

The aggregate amount of fees payable to the Non-Executive Directors may not exceed the limit set out in the Company's Articles of Association.

##### Intercontinental travel

To compensate Non-Executive Directors for the time spent travelling to attend meetings in another continent.

##### How the component operates

A fixed fee is paid, which is reviewed annually.

##### Maximum levels of payment

The aggregate amount of fees payable to the Non-Executive Directors may not exceed the limit set out in the Company's Articles of Association.

## Notes to future policy table - Non-Executive Directors

### Additional duties undertaken by Non-Executive Directors

In the event that the Chair or a Non-Executive Director is required to undertake significant executive duties in order to support the Executive Directors during a period of absence due to illness or a gap prior to the appointment of a permanent Executive Director, the Committee is authorised to determine an appropriate level of fees which will be payable. These fees will not exceed the amounts which would normally be paid to a permanent Executive Director undertaking such duties and will not include participation in short or long-term incentive arrangements or benefit plans.

### Additional Benefits

The Committee will have the discretion to approve such additional benefits for Non-Executive Directors as may

be required or reasonably necessary in connection with the performance of their duties, including without limitation expenses and associated taxes.

### Policy on recruitment arrangements

Any new Non-Executive Director will be paid in accordance with the current fee levels on appointment, in-line with the Policy set out above. With respect to the appointment of a new Chair, fee levels will take account of market rates, the individual's profile and experience, the time required to undertake the role and general business conditions. In addition, the Committee retains the right to: (i) authorise the payment of relocation assistance or an accommodation allowance in the event of the appointment of a Chair not currently based in the UK; and (ii) authorise the payment of a contribution towards ongoing administrative support services as may be required or reasonably necessary to enable the Chair to fulfil the required duties and obligations of the role.

### Terms of appointment

The Chair and Non-Executive Directors have letters of appointment which set out the terms under which they provide their services to the Company. These are available for inspection at the Company's registered office: Building 5, Croxley Park, Hatters Lane, Watford, Hertfordshire WD18 8YE, United Kingdom.

The appointment of the Non-Executive Directors is not subject to a notice period, nor is there any compensation payable on loss of office, for example, should they not be re-elected at an Annual General Meeting. The Committee has the discretion to waive all or a portion of the notice period of six months applicable for the Chair.

The Chair and Non-Executive Directors are encouraged to acquire a shareholding in the Company equivalent in value to their basic fee within two years of their appointment to the Board.

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# Remuneration implementation report

The Remuneration Committee presents the Annual Report on Remuneration (the Implementation Report) which will be put to shareholders for an advisory vote at the Annual General Meeting to be held on 26 April 2023. The Terms of Reference of the Remuneration Committee describe our role and responsibilities more fully and can be found on our website: www.smith-nephew.com

## Work of the Remuneration Committee in 2022

In 2022, we held eight meetings and determined two further matters by written resolution. The Chief Executive Officer and the Chief Human Resources Officer, key members of the HR and Finance functions, the Company Secretary and Deputy Company Secretary also attended all or part of some of the meetings, except when their own remuneration was being discussed. Attendance by the members of the Committee at each meeting is set out on page 116 of this Annual Report. We also met with the independent remuneration consultants, Deloitte LLP (Deloitte), the remuneration advisors to the Committee. The work carried out by the Committee during the year is set out on pages 116-118.

Since the year end, we have reviewed the financial results for 2022 against the targets under the short-term and long-term incentive arrangements jointly with the Audit Committee.

We have also determined base salary increases for Executive Directors and Executive Officers with effect from April 2023 and have determined the payouts under the 2022 Annual Bonus Plan and the vesting under the Performance Share Programme 2020.

## Independent Remuneration Committee advisors

During the year, the Committee received information and advice from Deloitte. Deloitte is a global firm, which provides many services to the Company, including tax and consultancy services. Deloitte was appointed by the Committee following a full tender process in 2018 to provide remuneration advice to the Committee, independent from management.

During the year, Deloitte provided advice on market trends and remuneration issues in general, attended Committee meetings, assisted in the review of the Directors' Remuneration Policy, undertook calculations relating to the TSR performance conditions and advised on annual bonus reviews.

The fees paid to Deloitte for advice to the Committee during 2022, charged on a time and expense basis, were £103,725 ($127,696). Deloitte complies with the Code of Conduct in relation to Executive Remuneration Consulting in the UK and the Committee is satisfied that their advice is objective and independent.

Deloitte are to be appointed external auditors of the Group effective from 1 January 2024. As a result Deloitte are to be replaced as advisors to the Remuneration Committee at the conclusion of the Annual General Meeting in April 2023. A tender process is currently underway.

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## Remuneration continued

### Remuneration implementation report continued

#### Role of the Remuneration Committee

##### Main Responsibilities

- - Determination of Remuneration Policy for the Chair, Executive Directors, Executive Officers 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 in particular relating to CEO Pay Ratio and Gender Pay.
- - Approval of appropriate performance measures for short-term and long-term incentive plans for Executive Directors, Executive Officers and senior executives.
- - Determination of pay-outs under short-term and long-term incentive plans for Executive Directors, Executive Officers and senior executives.
- - Engage with major shareholders and ensure their views are sought and considered when determining the Remuneration Policy.

##### Key activities of the Committee during the year

- - Considered the terms of remuneration for the outgoing and incoming CEO.
- - Reviewed the Remuneration Strategy for the Executive Directors, Executive Officers and senior executives.

- - Reviewed out-turns for determining payouts to Executive Directors and Executive Officers under the 2019 Performance Share Programme, and 2021 Annual Bonus Plan.
- - Approved quantum of cash payments and awards to Executive Directors and Executive Officers under the 2021 Annual Bonus Plan and 2019 Performance Share Programme.
- - Approved the 2021 Directors' Remuneration Report.
- - Considered principles for setting the targets for the Annual Bonus Plan 2022 and 2022 Performance Share Programme.
- - Approved financial targets for the 2022 Annual Bonus Plan for Executive Directors, Executive Officers and senior executives.
- - Approved financial measures and targets for 2022 Performance Share Programme for Executive Directors and Executive Officers.
- - Reviewed and consulted with shareholders on changes proposed for the new Remuneration Policy for approval by shareholders at the Annual General Meeting in 2023.
- - Approved the TSR Peer Group for Performance Share Awards to be made in 2022.
- - Noted Gender Pay Report and CEO Pay Ratio figures.
- - Reviewed Chair fees.
- - Approved 2022 Remuneration Committee Business Plan.

- - Reviewed the performance against the targets under the 2022 Annual Bonus Plan, and 2020, 2021 & 2022 Performance Share Programme.
- - Commenced the search for a new Remuneration Advisor.

##### Matters of a routine nature considered by the Committee

- - Reviewed current plans and performance versus targets.
- - Received updates on the external market context and data.
- - Noted grants of awards under the Company's Share Plans.
- - Monitored dilution limits and the number of shares available for use in respect of discretionary and all-employee share plans.
- - Monitored adherence to shareholding guidelines for Executive Directors, Executive Officers and senior executives.
- - Received regulatory/best practice updates from Deloitte and other consulting groups.
- - Reviewed and approved the Committee's Terms of Reference.

#### Single total figure on remuneration (audited)

The amounts for 2022 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.2311 (2021: £ to US$1.3753) and CHF to US$1.0469 (2021: CHF to US$1.0939).

|  | Deepak Nath Appointed 1 April 2022 |  | Anne-Françoise Nesmes Appointed 27 July 2020 |  | Roland Diggelmann Appointed 1 November 2019 1 |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Fixed pay |  |  |  |  |  |  |
| Base salary | $1,083,558 | - | $747,224 | $797,674 | $361,181 | $1,509,582 |
| Pension payments | $22,875 | - | $89,667 | $95,721 | $43,342 | $182,587 |
| Taxable benefits | $18,874 | - | $15,248 | $17,005 | $10,284 | $65,923 |
| Total Fixed Pay | $1,125,243 | - | $852,139 | $910,400 | $414,807 | $1,758,092 |
| Annual variable pay |  |  |  |  |  |  |
| Annual Incentive Plan/ Annual Bonus Plan - cash element | $371,888 | - | $251,194 | $398,053 | $94,148 | $672,167 |
| Annual Incentive Plan/ Annual Bonus Plan - equity element | $371,887 | - | $251,193 | $398,053 | $94,148 | $672,167 |
| Long-term variable pay |  |  |  |  |  |  |
| Performance Share Programme | - | - | - | - | - | - |
| Total Variable Pay | $743,775 | - | $502,387 | $796,106 | $188,296 | $1,344,334 |
| Forfeited Incentives 2 |  |  |  |  |  |  |
| Cash Bonus | $371,414 | - | - | - | - | - |
| Non-Performance Based Awards | $2,132,844 | - | - | - | - | - |
| Performance Based Award | $1,581,970 | - | - | - | - | - |
| Total Forfeited Incentives | $4,086,228 |  |  |  |  |  |
| Total Pay | $5,955,246 | - | $1,354,526 | $1,706,506 | $603,103 | $3,102,426 |

1 Stepped down from the Board on 31 March 2022.

2 Cash bonus and performance based award are part of annual variable pay and the non-performance based award is part of fixed pay. Total variable pay is $2,697,159. Total fixed pay is $3,258,119.

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GOVERNANCE
ACCOUNTS
OTHER INFORMATION

| Base salary | The actual salary receivable for the year. |
| --- | --- |
| Pension payments | The value of the salary supplement in lieu of pension or contribution to any pension scheme made by the Company. |
| Taxable benefits | The gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year. |
| Annual Incentive Plan - cash element/Annual Bonus Plan | The value of the cash incentive payable for performance in respect of the relevant financial year. |
| Annual Incentive Plan - equity element/Annual Bonus Plan | The value of the equity element awarded in respect of performance in the relevant financial year as described on pages 132-135 of this report. |
| Performance Share Programme | The value of shares vesting that were subject to performance over the three-year period ending on 31 December in the relevant financial year. For awards vesting in early 2023 this is based on an estimated share price of 1,056.07p per share, which was the average price of a share over the last quarter of 2022. |
| Total | The sum of the above elements. |

All data is presented in our reporting currency of US Dollars (USD). Amounts for Roland Diggelmann have been converted from Swiss Francs (CHF) and for Anne-Françoise Nesmes from Sterling (GBP) using average exchange rates. Given currency movements in 2022, this may give the impression of changes that are misleading. Data is presented in local currency in the subsequent sections in the interests of full transparency.

### Forfeited Incentives

These relate to buy-out awards received by Deepak Nath in respect of outstanding incentives he forfeited on leaving his former company (details of which were outlined on page 129 of the 2021 Annual Report). They comprise:

- A cash bonus of $371,414 paid in November 2022 in respect of a forfeited 2022 cash bonus. This relates to legacy arrangements implemented by his previous employer and was based on an estimate of the bonus he forfeited upon leaving Siemens Healthineers ("SH"). The calculated value of the bonus was determined following confirmation from SH of performance against the targets attached to the forfeited bonus.
- Awards of 132,048 Restricted Stock Units (RSU) in respect of forfeited restricted share awards of an equivalent face value. RSU awards over a total of 96,907 shares vested on 16 and 23 May 2022. RSU awards over a total of 12,161 shares vested on 8 and 14 November 2022. The shares are valued at 1,312p being the share price at the date of grant (29 April 2022). More details are on page 138.
- 117,245 performance shares that vested in December 2022 in respect of a forfeited performance share award of an equivalent face value originally granted in 2018. The number of shares that vested was determined following confirmation of performance against the targets attached to the original award. The shares are valued at 1096p being the share price at the date of vesting on 8 December 2022. More details of this award are on page 138 alongside details of the additional 182,228 performance shares awarded to Deepak that will vest, and will be included in the single figure table, in 2023 and 2024.

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131

## Remuneration continued

### Remuneration implementation report continued

#### Fixed pay

##### Base salary

As normal, the base salaries of the Executive Directors were reviewed in February 2023 and it was determined that their salaries be increased by 3.5%. The general increase to base pay in 2023 (inclusive of a 2.5% off-cycle increase), 6.5% for US and 6% for UK employees.

Deepak Nath was appointed as Chief Executive Officer on 1 April 2022 with a base salary of $1,475,000. This has increased by 3.5% to $1,526,625 effective from 1 April 2023.

Anne-Françoise Nesmes' base salary also increased by 3.5% to £637,519 (2022: £615,960) effective from 1 April 2023.

##### Pension payments

Deepak Nath received a Company pension contribution of $22,875 in line with the limits set forth by the US tax authority and the pension arrangement for the wider US workforce.

Anne-Françoise Nesmes receives a salary supplement of 12% of basic salary to apply towards her retirement savings, in lieu of membership of one of the Company's pension schemes. This is in-line with the pension arrangement for the wider UK workforce.

Roland Diggelmann participated in the Swiss Profund pension plan. He was employed under a Swiss contract, which is where he was domiciled. Between 1 January and 31 March 2022 (the period in which he was CEO and a member of the Board), total Company pension contributions for Roland amounted to CHF41,400, which is equivalent to 12% of his base salary for that period.

##### Benefits

In 2022, Deepak Nath received life insurance cover of $1 million plus accidental death and dismemberment insurance of $1 million. Anne-Françoise Nesmes received life insurance cover of seven times basic salary for the period 1 January 2022 to 31 March 2022 which was changed to four times basic salary in line with the changes made to the wider UK workforce. Roland Diggelmann received death in service cover of seven times basic salary.

Each Executive Director received health cover for themselves and their families, a car and fuel allowance and financial consultancy advice. The same arrangements will apply in 2023. The following table summarises the value of benefits in respect of 2022 and 2021.

|  | Deepak Nath (Appointed 1 April 2022) |  | Anne-Françoise Nesmes |  | Roland Diggelmann (Stepped down from the Board on 31 March 2022) |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Health cover | $8,871 | - | £986 | £965 | CHF1,723 | CHF6,893 |
| Car and fuel allowance | $8,467 | - | £11,400 | £11,400 | CHF8,100 | CHF32,400 |
| Financial consultancy advice | £1,248 | - | - | - | - | £16,680 |

#### Annual incentives

##### Annual Bonus Plan 2022

Following the approval of the Remuneration Policy at the 2020 Annual General Meeting, the maximum opportunity under the Annual Bonus Plan for Executive Directors is 215% of base salary, subject to satisfactory performance against the performance measures detailed below. 50% of the award is paid in cash and 50% is deferred into shares which will vest after three years.

The performance measures and weightings which applied to the Annual Bonus Plan 2022 were as follows:

|  | Weighting | Threshold as a percentage of salary | Target as a percentage of salary | Maximum as a percentage of salary |
| --- | --- | --- | --- | --- |
| Revenue | 40% | 12.8% | 43% | 86% |
| Trading margin | 40% | 12.8% | 43% | 86% |
| Business (including ESG) Objectives 1 | 20% | 6.4% | 21.5% | 43% |

1 25% of this element of the bonus was based on ESG objectives.

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STRATEGIC REPORT^{}[] GOVERNANCE^{}[] ^{}[] ACCOUNTS^{}[] ^{}[] OTHER INFORMATION

The 2022 targets and outturn for revenue and trading margin are shown below:

|  | Threshold | Target | Maximum | Actual 1 |
| --- | --- | --- | --- | --- |
| Revenue | $5,140m | $5,372m | $5,493m | $5,380m |
| Trading Margin | 18.0% | 18.4% | 18.9% | 17.2% |

1 Actual revenue and trading margin is compared with the target range at constant exchange rates to ensure a like-for-like comparison. See page 236.

## Financial objectives

The revenue target for 2022 is set by reference to our expectations for growth for the year. Threshold was set at 4.3 percentage points below target and maximum was set at 2.3 percentage points above target.

The trading margin target was set by reference to budgeted trading profit margin for the year. Threshold and maximum were set at 93.6% and 105% of budgeted trading profit margin, divided by threshold and maximum revenue respectively.

Performance resulted in an overall payout of 53% of target against the financial objectives.

Accordingly, the following amounts have been earned by Deepak Nath, Anne-Françoise Nesmes and Roland Diggelmann for 2022 under the Annual Bonus Plan in respect of their financial objectives.

| Deepak Nath | $505,931 |
| --- | --- |
| Anne-Françoise Nesmes | £277,591 |
| Roland Diggelmann | CHF157,782 |

As well as considering the monetary outcome of the formulaic calculation of these awards, the Committee considered that this performance fairly represented the overall financial performance during the year.

## Business and ESG objectives

In determining performance against the business and ESG objectives, the Executive Directors have been assessed on the same basis as applies to all employees across the Group using a four-point rating scale reflecting both what has been achieved and how it has been achieved. At the beginning of the year, specific objectives were determined relating to achievement of the corporate strategy. For 2022, these objectives were Growth, People and Business processes as in 2021. Performance against these business objectives was considered alongside how the Executive Directors performed in respect of our culture pillars of Care, Collaboration and Courage. This includes consideration of performance against sustainability, compliance and quality metrics. Their overall performance has been assessed according to the extent to which the Executive Directors have met the expectations of the Board. The 20% of the Annual Bonus Plan which is attributable to business and ESG objectives will be paid out as follows:

| Performance | % of base salary |
| --- | --- |
| Below expectations | Nil |
| Partially met expectations | 6.4% |
| In-line with expectations (100% of target) | 21.5% |
| Above expectations | 43% |

When setting objectives for the upcoming year, the Board looks not only at the expected financial performance for the year, but also at the actions it expects the Executive Directors to carry out in the year to build a solid foundation for financial performance over the longer term. In reviewing performance against these objectives at the end of the year, the Board is mindful that there is not always a necessary correlation between financial performance and the achievement of business and ESG objectives. The table below sets out how the Chair and the Board have assessed how Deepak Nath and Anne-Françoise Nesmes have performed against the objectives of Growth, People and Business Processes.

Smith+Nephew Annual Report 2022

133

## Remuneration continued

### Remuneration implementation report continued

#### Annual incentives continued

| Annual Bonus Plan 2022 |  |
| --- | --- |
| Deepak Nath | Anne-Françoise Nesmes |
| People |  |
| - Exceeded against target to continue to embed the culture pillars and purpose to drive engagement and continuity as evidenced by improved Gallup engagement. - Achieved against target to strengthen Executive Committee effectiveness aligned to new strategy with clear objectives to measure performance. - Partially achieved against target to have talent in place to deliver success and make progress to build a more diverse and inclusive workforce. Missed target of voluntary attrition and incumbent roles filled from our talent pipeline of high value roles. Exceeded target of women in senior leadership with additional focus required on increasing women in middle-management roles. - Achieved against target to continue development and succession planning for leadership team roles with internal successors identified. | - Achieved against target to implement people Finance priorities per roadmap with launch of the Finance Competency Framework. - Achieved against target to put in place IT and GBS succession plans, strengthening GBS leadership with a clear organisational design. - Achieved against target to drive IDE, holding immersion sessions on Culture Commitments to foster adoption. |
| Organisation and Process |  |
| - Achieved against target to strengthen, accelerate and transform Smith+Nephew for structurally higher growth and greater patient impact. Defined a clear 12-point plan to transform the organisation with established KPIs, governance and milestones. - Achieved against our target to reduce Scope 1 & 2 greenhouse gasses by 70% by the end of 2025 with a carbon roadmap developed. - Achieved against the delivery of our waste to landfill target for Malaysia and Memphis sites. - Partially achieved against the target of a clear Scope 3 plan and milestones outline, with the roadmap for Scope 3 under development. - Achieved against target to uphold the highest standards of Quality and Compliance. | - Achieved against target to partner with Executive Committee to drive trading margin improvement, supporting 12-point plan milestones with financial actions and milestones. - Achieved against target to define IT/Enterprise Resource Planning strategy for medium to long term, including assessment of SAP, enterprise strategy and roadmap. - Achieved against target to provide stronger data and insights to support decision making including market analysis. - Lead the efforts to produce TCFD reporting resulting in integrated ESG reporting and a clear plan for Scope 3 disclosures. Leveraged framework tools to identify risks and opportunities and developed scenario analysis for climate related financial risks and opportunities. - Achieved against target to improve Finance and IT control environment, ensuring cyber security plans and IT Sox controls are implemented. |
| Customer |  |
| - Achieved against the target of 80% delivery of successful launches for our top 10 NPD programs. - Achieved against the target to launch at scale through the prioritization of development programmes. - Achieved against target of seamless integration of value-creating acquisitions and performance against plan. Achieved against target to actively engage with key stakeholders to build support for our new strategy and highlight progress. | - Drove rollout of the sales, inventory and operations planning (SIOP) process and on track to deliver order-to-cash process. - Achieved against target to ensure comprehensive disclosure and reporting that meets the needs of stakeholders |
| This resulted in a calculated bonus achievement of 100% of target in respect of Deepak Nath's business and ESG objectives. | This resulted in a calculated bonus achievement of 100% of target in respect of Anne-Françoise Nesmes' business and ESG objectives. |

Roland departed on 31 March 2022. The rating of Partially achieved reflects the performance against business and ESG objectives for the period for which he was employed.

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GOVERNANCE
ACCOUNTS
OTHER INFORMATION

Therefore the total amount earned by Executive Directors in 2022 under the Annual Bonus Plan 2022 is:

|  | Amount earned in respect of financial objectives | Amount earned in respect of business objectives | Total amount earned | Total as percentage of target | Total as percentage of salary |
| --- | --- | --- | --- | --- | --- |
| Roland Diggelmann 1 | CHF157,782 | CHF22,080 | CHF179,862 | 48.5% | 52% |
| Deepak Nath 2 | $505,931 | $237,844 | $743,775 | 63% | 67% |
| Anne-Françoise Nesmes | £277,591 | £130,499 | £408,090 | 63% | 67% |

1 Bonus paid is for employment during the period 1 January 2022 to 31 March 2022.

2 Bonus paid is for employment during the period 1 April 2022 to 31 December 2022.

The Board has reviewed the formulaic calculation of these figures. We acknowledged that during 2022, the share price had slightly fallen, that the Company had delivered a mixed performance ending the year in a much stronger position and that there had been no reputational risk issues during the year. We therefore determined this fairly represents the performance of the Company and of the Executive Directors during 2022.

50% of the total amount earned will be paid in cash and the remaining 50% will be deferred into shares which will vest after three years.

## 2023 Annual Bonus

The maximum opportunity under the Annual Bonus Plan for Executive Directors will be 215% of base salary, subject to satisfactory performance against the performance measures detailed below. 50% of the award will be paid in cash and 50% will be deferred into shares which will vest after three years.

The performance measures and weightings which apply to the Annual Bonus Plan 2023 are as follows:

|  | Weighting | Threshold as a percentage of salary | Target as a percentage of salary | Maximum as a percentage of salary |
| --- | --- | --- | --- | --- |
| Revenue | 40% | 12.8% | 43% | 86% |
| Trading margin | 40% | 12.8% | 43% | 86% |
| Business objectives | 15% | 4.8% | 16.125% | 32.25% |
| ESG objectives | 5% | 1.6% | 5.375% | 10.75% |

For reasons of commercial sensitivity, we are unable to disclose the precise targets for revenue and trading margin for 2023 now, which are both set by reference to our expectations for growth for the year. They will be disclosed retrospectively in the 2023 Annual Report, when performance against those targets are determined.

## Long-term incentives

### Performance Share Programme

#### Performance Share Programme 2020

Since the end of the year, the Committee has reviewed the vesting of conditional awards made to former Executive Directors in 2020 under the Global Share Plan 2020. Vesting of the conditional awards made in 2020 was subject to performance against four equally weighted performance measures - TSR, global revenue growth, cumulative free cash flow and return on invested capital - measured over a three-year period commencing 1 January 2020.

**TSR performance** 25% of the award was based on the Company's TSR performance relative to two equally weighted peer groups against which the Company's TSR performance was measured as follows:

- A sector-based peer group based on those companies classified as the S&P 1200 Global Healthcare subset comprising medical devices, equipment and supplies companies (official industry classifications of 'Health Care Equipment and Supplies, Life Sciences Tools & Services and Health Care Technology'). The Company's TSR was -33.7% against an index TSR for the peer group of 14.2%.
- FTSE 100 constituents excluding financial services and commodities companies. This is in response to shareholders who assess our performance not based on sector, but instead based on the index we operate in. The Company's TSR was -33.7% against an index TSR for the peer group of -8.1%.

In aggregate therefore, the Company's TSR performance results in a final vesting outcome of 0% out of the 25% target.

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## Remuneration continued

### Remuneration implementation report continued

#### Long-term incentives continued

##### Performance Share Programme continued

**Global revenue growth** 25% of the award was based on global revenue growth. The threshold set in 2020 was $16,628 million with a target of $16,968 million. Over the three-year period, the adjusted revenues in Global Revenue Growth were $14,918 million. These adjustments include translational foreign exchange and Board-approved M&A.

This part of the award therefore vested at 0% out of the 25% target.

**Cumulative free cash flow performance** 25% of the award was based on cumulative cash flow performance. The target set in 2020 was $2,285 million with maximum at $2,742 million. Over the three-year period, the adjusted cumulative free cash flow was $958 million which was below threshold. These adjustments include items such as Board-approved M&A, restructuring programmes and translational foreign exchange.

This part of the award therefore vested at 0% out of the 25% target.

**Return on invested capital (ROIC)** 25% of the award was based on return on invested capital defined as follows:

$$\frac{\text{Operating profit}^1 \text{ less adjusted taxes}^2}{(\text{Opening net operating assets} + \text{closing net operating assets})^3 \div 2}$$

1 Operating Profit is as disclosed in the Group income statement in the Annual Report less amortisation of acquired intangible assets.

2 Adjusted taxes represents our taxation charge per the Group income statement adjusted for the impact of tax on items not included in Adjusted Operating Profit notably amortisation of acquired intangible assets, interest income and expense, other finance costs and share of results of associates.

3 Net Operating Assets comprises net assets from the Group balance sheet (Total assets less total liabilities) excluding the following items: accumulated amortisation of acquired intangible assets, investments, investments in associates, retirement benefit assets and liabilities, long-term borrowings, bank overdrafts, borrowings and loans, IFRS 16 lease liabilities and right-of-use assets, and cash at bank.

The target set in 2020 was an average over three years of 12.0% with maximum at 13.5%. The adjusted average ROIC measurement for the three years was 8.2%. These adjustments include Board-approved M&A.

This part of the award therefore vested at 0% of the 25% target.

In summary therefore, the Performance Share Programme award made in 2020 vested at 0% of target as follows:

|  | Threshold | Target | Maximum | Actual | Percentage Vesting |
| --- | --- | --- | --- | --- | --- |
| TSR | Equal to Index | - | 8% Above Index | Below Index | 0% |
| Global revenue growth | $16,628m | $16,968m | $17,646m | $14,918m | 0% |
| Cumulative free cash flow | $2,057m | $2,285m | $2,742m | $958m | 0% |
| Return on invested capital | 10.5% | 12.0% | 13.5% | 8.2% | 0% |

As well as considering the monetary outcome of the formulaic calculation of these awards, the Committee considered whether discretion should be applied to override these formulaic outcomes and concluded that the monetary outcomes were aligned with the financial performance of the Company during the performance period and the intention of the Remuneration Policy.

#### Performance Share Programme 2022

In accordance with the Remuneration Policy approved by shareholders at the Annual General Meeting held on 9 April 2020, performance share awards were granted to the Executive Directors under the Global Share Plan 2020 to a maximum value of 275% of salary (137.5% for target performance) measured over the three financial years commencing 1 January 2022 against four equally weighted performance measures: Indexed TSR, Global Revenue Growth, ROIC and Cumulative Free Cash Flow. The performance conditions for these awards were determined in April 2022 and the awards were made in May 2022. The maximum payout under each element will only be for significant outperformance. On vesting, sufficient shares will be sold to cover taxation obligations and the Executive Directors will be required to hold the net shares for a further period of two years.

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STRATEGIC REPORT  
 **GOVERNANCE**  
 **ACCOUNTS**  
 **OTHER INFORMATION**

**TSR performance** 25% of the award is based on the Company's TSR performance measured against two equally weighted peer groups as defined for the awards made in 2020.

TSR performance is relative to the two separate indices as follows:

| Relative TSR | Award vesting as % of salary at date of grant |  |
| --- | --- | --- |
|  | Sector Based Peer Group | FTSE 100 Peer Group |
| Below the index | Nil | Nil |
| Equalling the index (Threshold vesting at 50% of target) | 8.6% | 8.6% |
| 8% above the index (Maximum vesting at 200% of target) | 34.4% | 34.4% |

Awards will vest on a straight-line basis between these points. The maximum has been set significantly above target reflecting the maximum opportunity for outperformance.

**Global revenue growth** 25% of the award is based on global revenue growth against the following targets:

| Revenue growth over three-year period commencing 1 January 2022 | Award vesting as % of salary |
| --- | --- |
| Below Threshold | Nil |
| Threshold (-5% of target) | 17.2% |
| Target - set by reference to our expectations | 34.4% |
| Maximum or above (+5% of target) | 68.8% |

It is not possible to disclose precise targets for sales growth as this will give commercially sensitive information to our competitors concerning our growth plans and is considered to be potentially price-sensitive information. This target however will be disclosed in the 2024 Annual Report, when the Committee will discuss performance against the target. The maximum has been set significantly above target reflecting the increased maximum opportunity for outperformance.

**Return on invested capital (ROIC)** 25% of the award is based on ROIC, as defined for the awards made in 2020, with the following targets:

| Return on Invested Capital (three-year average) | Award vesting as % of salary |
| --- | --- |
| Below Threshold 8% | Nil |
| Threshold 8% (-1% of target) | 17.2% |
| Target 9% | 34.4% |
| Maximum or above 10.5% (+1.5% of target) | 68.8% |

Awards will vest on a straight-line basis between these points.

**Cumulative free cash flow** 25% of the award is based on cumulative cash flow performance defined for the awards made in 2020, with the following targets:

| Cumulative free cash flow | Award vesting as % of salary |
| --- | --- |
| Below $1,535m | Nil |
| $1,535m (-20% of target) | 17.2% |
| $1,913m | 34.4% |
| $2,104m or more (+10% of target) | 68.8% |

The maximum has been set significantly above target reflecting the maximum opportunity for outperformance.

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## Remuneration continued

### Remuneration implementation report continued

#### Performance Share Programme 2023

In early 2023, the Remuneration Committee considered the performance framework and determined the targets for the Performance Share Programme (“PSP”) awards due to be made in 2023. It was agreed that performance would be measured under the same four equally weighted performance measures which applied in 2022 - indexed TSR, Global Revenue Growth, ROIC, and Cumulative Free Cash Flow, as set out below. The Executive Directors will each be granted an award under the PSP on 9 March 2023 to the value of 275% of their base salary.

**TSR performance** 25% of the award will be based on the Company’s TSR performance, measured against the same peer groups and with the same targets as the awards made in 2022.

**Revenue growth** 25% of the award will be based on global revenue growth. It is not possible to disclose precise targets for sales growth as this will give commercially sensitive information to our competitors concerning our growth plans and is considered to be potentially price-sensitive information.

**ROIC** 25% of the award will be based on ROIC as defined for the awards made in 2022. Targets will be 8.5% at Threshold, 9.5% at Target and 10.5% at Maximum.

**Cumulative free cash flow** 25% of the award will be based on cumulative cash flow as defined for the awards made in 2022. It is not possible to disclose precise targets for this measure as this is considered to be commercially sensitive information.

#### Details of outstanding awards made under the Performance Share Programme

Details of conditional awards over shares granted to Executive Directors subject to performance conditions are shown below. These awards were granted under the Global Share Plan 2020. The performance conditions and performance periods applying to these awards are detailed below:

|  | Date granted | Outstanding number of ordinary shares under award at maximum | Date of vesting |
| --- | --- | --- | --- |
| Deepak Nath | 20 May 2022 | 259,422 | 20 May 2025 |
| Anne-Françoise Nesmes | 20 May 2022 | 134,648 | 20 May 2025 |
| Anne-Françoise Nesmes | 21 May 2021 | 102,935 | 21 May 2024 |
| Anne-Françoise Nesmes | 21 Dec 2020 2 | 42,725 | 21 Dec 2023 |
| Roland Diggelmann 1 | 21 May 2021 | 55,282 | 21 May 2024 |
| Roland Diggelmann 1 | 21 May 2020 2 | 135,765 | 21 May 2023 |

1 Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022. The awards shown have been pro-rated based on the length of service during the performance period.

2 The awards granted on 21 May 2020 and 21 December 2020 did not achieve the performance conditions and lapsed in full on 21 February 2023.

#### Summary of scheme interests awarded during the financial year (audited)

| Director | Deepak Nath 1,2 |  | Anne-Françoise Nesmes |  | Roland Diggelmann 3 |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Number of shares | Face value | Number of shares | Face value | Number of shares | Face value |
| Performance Share Programme award at maximum (see pages 135-137) | 259,422 | £3,263,528.76 | 134,648 | £1,693,871.84 | 0 | £0 |
| Deferred Share Bonus Plan award (2021 bonus) | 0 | £0 | 24,169 | £289,423.78 | 42,113 | £504,303.18 |
| Buy-out award agreement 1 | 441,737 | £5,795,589.44 | N/A | N/A | N/A | N/A |

1 As outlined on page 129 of the 2021 Annual Report, Deepak Nath’s buy-out awards are in respect of outstanding equity incentives he forfeited on leaving his former company. All awards have been provided on a like-for-like basis in terms of the value provided and their performance and/or vesting periods. The awards (granted on 29 April 2022) comprised the following: 132,048 RSUs vesting between May 2022 and November 2025 127,461/84,868/97,360 performance shares vesting in November 2022/2023/2024 subject to the original performance conditions applicable to the forfeited performance share awards granted to Deepak by Siemens Healthineers AG (“SH”) in November 2018/2019/2020.

2 As noted above, a performance award over 127,461 shares was granted to Deepak Nath with vesting subject to the performance conditions applicable to the performance share award over SH shares originally granted to Deepak by SH in November 2018. Following completion of the performance measurement period, SH provided confirmation that 91.985% of the original award would have vested. Accordingly, 117,245 shares from the buy-out award vest with the balance, 10,216 shares, lapsing.

3 Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.

Please see Policy Table contained within the Annual Report 2020 on pages 128-137 on our website at www.smith-nephew.com for details of how the above plans operate. Following approval of the 2020 Remuneration Policy, no Annual Equity Incentive Programme awards were granted during 2022. The number of shares is calculated using the closing share price on the day before grant, which for the Performance Share Programme award granted on 20 May 2022 was 1,258.0p. The Deferred Share Bonus Plan award granted on 9 March 2022 is calculated using the closing share price on the day before grant being 1,197.5p. The buy-out award agreement granted on 29 April 2022 to Deepak Nath is calculated using the closing share price on the day before grant being 1,312.0p.

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STRATEGIC REPORT
GOVERNANCE
ACCOUNTS
OTHER INFORMATION

## Single total figure on remuneration
Chair and Non-Executive Directors (audited)

| Director | Basic annual fee 1 |  | Committee Chair/ Senior Independent Director fee |  | Intercontinental travel fee |  | 2022 | Total 2021 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |  |  |
| Roberto Quarta | £428,645 | £428,645 | - | - | £3,500 | - | £432,145 | £428,645 |
| Jo Hallas 2 | £64,250 | £18,173 | - | - | £3,500 | - | £67,750 | £18,173 |
| Erik Engstrom | £69,500 | £69,500 | - | - | - | - | £69,500 | £69,500 |
| Robin Freestone 3 | £53,750 | £69,500 | £15,000 | £20,000 | - | - | £68,750 | £89,500 |
| John Ma | $129,780 | $113,472 | - | - | $21,000 | - | $150,780 | $113,472 |
| Katarzyna Mazur-Hofsaess | £69,500 | £69,500 | - | - | £3,500 | - | £73,000 | £69,500 |
| Rick Medlock | £69,500 | £69,500 | £20,000 | £20,000 | £3,500 | - | £93,000 | £89,500 |
| Marc Owen 4 | $129,780 | $129,780 | $35,000 | $35,000 | $21,000 | $7,000 | $185,780 | $171,780 |
| Angie Risley | £69,500 | £69,500 | £20,000 | £20,000 | £3,500 | - | £93,000 | £89,500 |
| Bob White | $129,780 | $129,780 | - | - | $7,000 | - | $136,780 | $129,780 |

1 The basic annual fee includes shares purchased for the Chair and Non-Executive Directors in lieu of part of the annual fee, details of which can be found on the table below.

2 Jo Hallas was appointed as a Non-Executive Director with effect from 1 February 2022.

3 Robin Freestone retired as a Non-Executive Director with effect from 30 September 2022.

4 Marc Owen waived his right to receive a $35,000 increase in fees pursuant to his appointment as Senior Independent Director on 1 October 2022.

### Chair and Non-Executive Director fees

In February 2023 the fees paid to the Chair and the other Non-Executive directors were reviewed and it was determined that with effect from 1 April 2023 the fees paid will remain unchanged:

| Annual fee paid to the Chair | £428,645 of which £107,161 paid in shares |
| --- | --- |
| Annual fee paid to Non-Executive Directors | £69,500 of which £6,500 paid in shares or $129,780 of which $9,780 paid in shares |
| Intercontinental travel fee (per meeting) | £3,500 or $7,000 |
| Fee for Senior Independent Director and Committee Chair | £20,000 or $35,000 |

As part of the appointment of the new Chair, the Committee undertook the first detailed review of the associated fee since 2014 when the current Chair was first appointed. The review took into account a range of factors including relevant market data and the anticipated time commitment involved with the role. The resulting fee agreed by the Committee is £450,000 effective from 15 September 2023 and the new Chair will be required, each year, to purchase shares worth at least 25% of his post-tax annual fee.

### Payments made to former Directors (audited)

Roland Diggelmann ceased to be Chief Executive Officer and a member of the Board on 31 March 2022. As detailed in last year's Remuneration Report, in accordance with his employment agreement and with the Remuneration Policy approved by shareholders on 9 April 2020, Roland Diggelmann continued to receive his base salary of CHF1,380,000, pension payments and benefits up to 28 February 2023.

Roland Diggelmann holds an award over 42,113 shares under the Deferred Share Bonus Plan ("DBP") which was granted on 9 March 2022. This represented 50% of his 2021 bonus which vests after three years in line with the Remuneration Policy. He will receive a further award under the DBP on 9 March 2023 to the value of 50% of his 2022 annual bonus. Roland also holds awards (in aggregate) over 191,048 shares at maximum under the Performance Share Programme, exclusive of dividend equivalents. These shares were pro-rated to his date of leaving and vest subject to achievement of the relevant performance conditions.

Legal fees incurred in connection with Roland Diggelmann's stepping down from the Board of up to CHF 5,000 for Swiss legal advice and of up to £5,000 for English law advice are payable by the Company.

### Service contracts

Executive Directors are employed on rolling service contracts with notice periods of up to 12 months from the Company and six months from the Executive Director. Further information can be found on page 125 of the Policy Report contained within the Annual Report 2020.

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## Remuneration continued

### Remuneration implementation report continued

#### Directors' interests in ordinary shares (audited)

Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:

|  | Deepak Nath |  |  | Roland Diggelmann 3 |  |  | Anne-Françoise Nesmes |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 1 January 2022 | 31 December 2022 | 10 February 2023 1 | 1 January 2022 | 31 December 2022 | 10 February 2023 1 | 1 January 2022 | 31 December 2022 | 10 February 2023 1 |
| Ordinary shares | - | 97,784 2 | 97,784 2 | 18,207 | N/A | N/A | - | - | - |
| Share options | - | - | - | 2,534 | - | - | 1,621 | 1,621 | 1,621 |
| Deferred Share Bonus Plan award (2021 bonus) | - | - | - | - | 42,113 | 42,113 | - | 24,169 | 24,169 |
| Buy-out award agreement | - | 205,208 | 205,208 | - | - | - | - | - | - |
| Performance Share Programme awards 2 | - | 259,422 | 259,422 | 385,420 | 191,048 | 191,048 | 145,662 | 280,310 | 280,310 |

1 The latest practicable date for this Annual Report.

2 These share awards are subject to further performance conditions before they may vest. The awards granted on 21 May 2020 and 21 December 2020 did not achieve the performance conditions and therefore lapsed in full on 21 February 2023 (see page 138 for further details).

3 Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.

The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company.

Beneficial interests of the Directors in the ordinary shares of the Company are as follows:

| Director | 1 January 2022 (or date of appointment if later) | 31 December 2022 (or date of retirement if earlier) | 10 February 2023 1 | Shareholding as % of annual salary/fee 2,19 |
| --- | --- | --- | --- | --- |
| Roberto Quarta 4 | 67,468 | 73,300 | 73,300 | 196.51 |
| Roland Diggelmann 5 | 18,207 | 18,207 | 18,207 | 37.68 |
| Erik Engstrom | 16,442 | 16,774 | 16,774 | 276.95 |
| Robin Freestone 6 | 16,420 | 16,752 | N/A | N/A |
| Jo Hallas 7 | - | 5,332 | 5,332 | 95.23 |
| John Ma 8 | 296 | 924 | 924 | 9.94 |
| Katarzyna Mazur-Hofsaess | 366 | 880 | 880 | 14.53 |
| Rick Medlock | 3,264 | 3,564 | 3,564 | 58.84 |
| Deepak Nath 8 | - | 97,784 | 97,784 | 92.14 |
| Anne-Françoise Nesmes | - | - | - | 23.86 |
| Marc Owen 4 | 8,072 | 16,478 | 16,478 | 177.25 |
| Angie Risley | 5,011 | 5,343 | 5,343 | 88.22 |
| Bob White 4 | 6,656 | 7,284 | 7,284 | 78.35 |

1 The latest practicable date for this Annual Report.

2 Calculated using the closing share price of 1,147.5p per ordinary share and $27.92 per ADS on 10 February 2023, and an exchange rate of £1:1.21125.

3 Due to their length of service some Non-Executive Directors have not met their shareholding requirements, but this will continue to be monitored in accordance with the Remuneration Policy.

4 Roberto Quarta, John Ma, Marc Owen and Bob White hold some of their shares in the form of ADS.

5 Roland Diggelmann stepped down from the Board as Chief Executive Officer with effect from 31 March 2022.

6 Robin Freestone retired from the Board as a Non-Executive Director with effect from 30 September 2022.

7 Jo Hallas was appointed Non-Executive Director with effect from 1 February 2022.

8 Deepak Nath was appointed Chief Executive Officer with effect from 1 April 2022.

9 For the purposes of calculating an Executive Director's performance against their shareholding requirement, ordinary shares or ADRs held by the individual and their immediate family are included as are unvested awards under the DBP (on a net of tax basis) but not awards subject to an ongoing performance condition. The percentages in this column are consistent with this methodology.

The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.

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### Chief Executive Officer remuneration compared to employees generally

The percentage change in the remuneration of the Chief Executive Officer between 2021 and 2022 compared to that of employees generally was as follows:

|  | % change 2021/2022 |  |  | % change 2020/2021 |  |  | % change 2019/2020 |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Salary/fees | Taxable benefits | Annual incentive | Salary/fees | Taxable benefits | Annual incentive | Salary/fees | Taxable benefits | Annual incentive |
| Executive Directors |  |  |  |  |  |  |  |  |  |
| CEO 1 Deepak Nath Roland Diggelmann | 0% | -55.54% | 44.89% | 0% | 0% | N/A | 0% | 0% | N/A |
| CFO Anne Françoise Nesmes Graham Baker | 4.62% | 3.97% | -29.50% | 0% | 0% | N/A | 4.00% | -57.00% | -100.00% |
| Non Executive Directors 2 | 0% | 0% | N/A | 0% | 0% | N/A | 0% | N/A | N/A |
| Average of all employees | 5.95% | N/A | N/A | 1.64% | N/A | N/A | 3.30% | N/A | N/A |

1 Represents the difference between Roland Diggelmann and Deepak Nath.

2 There was no change to the fees paid to Non-Executive Directors during 2022.

The average cost of wages and salaries for employees generally decreased by 1.19% in 2022 (see Note 3.1 to the Group accounts). Figures for annual cash bonuses are included in the numbers.

When considering remuneration arrangements for our Executive Directors, the Committee takes into account pay across the Group in the following ways:

- Salary levels and increases for all employees including Executive Directors take account of the scope and responsibility of position, the skills, experience and performance of the individual and general economic conditions within the relevant geographical market. When considering increases to Executive Director base salaries, the Committee considers the average pay increases in the market where the Executive Director is based.
- All employees including the Executive Directors have performance objectives determined at the beginning of the year which cascade down from the Strategic Imperatives for the Group.
- The level of variable pay determined for all employees, whether in the form of shares or cash is dependent on performance against these imperatives, both financially and personally.
- Executive Directors participate in benefits plans and arrangements comparable to benefits paid to other senior executives in the relevant geography. Executive Directors participate in the same senior executive incentive plans (currently the Annual Bonus Plan and the Performance Share Programme) as other Executive Officers and senior executives. The level of award reflects the differing seniority of participants and the market where the Executive is located. Performance conditions for the Performance Share Programme are the same for Executive Directors and Executive Officers. Executives, however, have only three measures with no reference to ROIC. For the Annual Bonus Plan (ABP) Performance Measures apply to all Executives consistently, however, weighting between Financials and Non-Financials differs based on the position.

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## Remuneration continued

### Remuneration implementation report continued

#### Chief Executive Officer pay ratio

The regulations provide three options which may be used to calculate the pay for the employees at the 25th percentile, median and 75th percentile. We have used option A (as set out in the Companies (Miscellaneous Reporting) Regulations 2018), following guidance issued by some proxy advisers and institutional shareholders. The ratio has been calculated by comparing against the full-time equivalent pay of all UK employees within the Group including both our entities Smith & Nephew UK Limited and T.J.Smith and Nephew,Limited.

Option A calculates pay for all employees on the same basis as the single figure for remuneration calculated for Executive Directors. The period for which the employee pay has been calculated under Option A is the calendar year 2022. Figures are calculated by reference to 31 December 2022 using actual pay data from 1 January 2022 to 31 December 2022. The single figure for remuneration for each employee includes earned salary, annual incentive, allowance, pension and benefits for 2022. Part-time employees have been excluded for the purpose of calculations. The Chief Executive Office single figure is an amalgamation of the data for the two individuals who held the post during the year.

Comparisons have been made with employees at median (P50), lower (P25) and upper (P75) quartiles. We have used the actual salaries paid to our employees in the UK. The values were listed lowest to highest and three percentiles were identified. We are confident this methodology gives us the most reflective pay at the median. The Committee is satisfied that the individuals identified in the employee comparison group appropriately reflect the employee pay profile at those quartiles, and that the overall picture presented by the ratios is consistent with our pay, reward and progression policies for UK employees.

The table below sets out the ratio at the median, lower and upper quartiles:

| Year | P25 (lower quartile) | P50 (median) | P75 (upper quartile) |
| --- | --- | --- | --- |
| 2019 | 116:1 | 81:1 | 51:1 |
| 2020 | 42:1 | 29:1 | 19:1 |
| 2021 | 71:1 | 49:1 | 32:1 |
| 2022 | 160:1 | 107:1 | 70:1 |

In 2022, the ratio increased due to the impact of the buy-out award agreement made to Deepak Nath. Excluding this one-off arrangement, the median ratio would have been 47:1.

The table below provides the total pay figure used for each quartile employee, and the salary component within this.

| Component | CEO 1 | P25 (lower quartile) | P50 (median) | P75 (upper quartile) |
| --- | --- | --- | --- | --- |
| Salary | $1,816,153 | $38,619 | $59,669 | $52,021 |
| Total pay | $6,103,705 | $40,977 | $61,046 | $93,464 |

1 Roland Diggelmann is paid in Swiss Francs and this figure was converted into US Dollars for comparative reasons using CHF to US$1.046901.

#### Relative importance of spend on pay

When considering remuneration arrangements for our Executive Directors and employees as a whole, the Committee also takes into account the overall profitability of the Company and the amounts spent elsewhere, particularly in returning profits to shareholders in the form of dividends and share buy-backs.

The following table sets out the total amounts spent in 2022 and 2021 on remuneration, the attributable profit for each year and the dividends declared and paid in each year.

|  | For the year to 31 December 2022 | For the year to 31 December 2021 | % change |
| --- | --- | --- | --- |
| Attributable profit for the year | $223m | $524m | -57% |
| Dividends paid during the year | $327m | $329m | 0% |
| Share buy-back 1 | $158m | $0m | +100% |
| Total Group spend on remuneration | $1,565m | $1,562m | 0% |

1 Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. In December 2021 we announced an updated capital allocation policy to prioritise the use of cash. The 2022 share buyback programme commenced on 22 February 2022 and $150 million was completed by 31 August 2022. As macroeconomic conditions continued to be uncertain, including higher cost inflation, the Board decided it was prudent to delay further buybacks until conditions improved. We remain committed to returning surplus cash to shareholders over time.

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### Total Shareholder Return

A graph of the Company's TSR performance compared to that of the FTSE 100 index, of which the Company, is a constituent is shown below in accordance with Schedule 8 to the Regulations.

![img-0.jpeg](img-0.jpeg)

As we also compare the Company's performance to a tailored sector peer group of medical devices companies (see page 135), when considering TSR performance in the context of the Global Share Plan 2010 and Global Share Plan 2020, we feel that the following graph showing the TSR performance of this peer group is also of interest.

![img-1.jpeg](img-1.jpeg)

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## Remuneration continued

### Remuneration implementation report continued

#### Table of historic data

The following table details information about the pay of the Chief Executive Officer in the previous 10 years:

| Year | Chief Executive Officer | Single figure of total remuneration $ | Annual Cash Incentive payout against maximum % | Long-term incentive vesting rates against maximum opportunity |
| --- | --- | --- | --- | --- |
|  |  |  |  | Performance Share Programme shares % |
| 2022 | Deepak Nath 1 | $5,955,246 | 32 | - |
| 2022 | Roland Diggelmann | $603,103 | 24 | - |
| 2021 | Roland Diggelmann | $3,102,426 | 41 | - |
| 2020 | Roland Diggelmann | $1,697,773 | 0 5 | - |
| 2019 | Roland Diggelmann 2 | $265,814 | - | - |
| 2019 | Namal Nawana 3 | $4,489,374 | 71 6 | - |
| 2018 | Namal Nawana | $2,883,632 | 69 | - |
| 2018 | Olivier Bohuon 4 | $2,383,582 | 63 | 46.5 |
| 2017 | Olivier Bohuon | $5,116,689 | 61 | 54 |
| 2016 | Olivier Bohuon | $3,332,850 | 30 | 8 |
| 2015 | Olivier Bohuon | $5,342,377 | 75 | 33.5 |
| 2014 | Olivier Bohuon | $6,785,121 | 43 | 57 |
| 2013 | Olivier Bohuon | $4,692,858 | 84 | 0 |

1 Appointed Chief Executive Officer on 1 April 2022.

2 Appointed Chief Executive Officer on 1 November 2019 and stepped down on 31 March 2022.

3 Appointed Chief Executive Officer on 7 May 2018 and resigned on 31 October 2019.

4 Retired as Chief Executive Officer on 7 May 2018.

5 Due to the impact of Covid upon the Chief Executive Officer's financial targets, a cash award of 0% was achieved.

6 Calculated as 106.7% for Namal Nawana (disclosed on page 108 of the Company's Annual Report for the year ended 31 December 2019), divided by the maximum potential payout of 150%.

#### Gender pay ratio

In 2022, the Committee reviewed our UK gender pay ratio. It was noted that today our gender pay gap is greater than we would like it to be, but we are seeing improvements year-on-year. Our mean pay gap for the UK has decreased from 20% in 2021 to 16% in 2022, and the median gap has decreased from 17% in 2021 to 16% in 2022. We shall continue to review these figures.

#### Shareholding requirements

The Chief Executive Officer is required to hold three times his salary in the form of shares and the Chief Financial Officer is required to hold two times her salary. Executive Directors have five years from their appointment within which to meet that holding requirement. Due to the tenure of the Executive Directors neither have met their shareholding requirements, but this will continue to be monitored in accordance with the Remuneration Policy.

#### Post cessation shareholding requirements

In addition, Executive Directors are expected to hold vested shares for up to two years post-vesting of the Performance Share Programme and Deferred Share Bonus Plan. They are expected to hold up to their shareholding requirement only. These shares are held in the vested Share Plan Account provided by the Company's share plan administrator.

#### Statement of voting at Annual General Meeting

At the Annual General Meeting held on 13 April 2022, votes cast by proxy and at the meeting and votes withheld in respect of the votes on the Directors' Remuneration Report are noted below. In addition, votes cast by proxy and at the meeting and votes withheld in respect of the votes on the Directors' Remuneration Policy, which was last approved by shareholders on 9 April 2020 are noted below:

| Resolution | Votes for | % for | Votes against | % against | Total votes validly cast | Votes withheld |
| --- | --- | --- | --- | --- | --- | --- |
| Approval of the Directors' Remuneration report (excluding policy) | 647,076,103 | 96.71 | 22,010,946 | 3.29 | 669,087,049 | 1,731,661 |
| Approval of the Directors' Remuneration Policy at the 2020 Annual General Meeting | 676,749,445 | 97.71 | 15,843,720 | 2.29 | 692,593,165 | 352,762 |

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### Senior management remuneration

The Group's administrative, supervisory and management body (senior management) comprises for US reporting purposes, Executive Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 86-89.

Compensation paid to senior management in respect of 2020, 2021 and 2022 was as follows:

|  | 2022 | 2021 | 2020 |
| --- | --- | --- | --- |
| Total compensation (excluding pension emoluments, but including cash payments under the performance-related incentive plans) | $17,211,000 | $15,795,000 | $12,369,000 |
| Total compensation for loss of office | - | - | - |
| Aggregate increase in accrued pension scheme benefits | - | - | - |
| Aggregate amounts provided for under supplementary schemes | $1,626,000 | $1,454,000 | $1,753,000 |

As at 10 February 2023, senior management owned 530,016 shares and 8,457 ADSs, constituting less than 0.063% of the share capital of the Company. For this purpose, the Group is defined as the Executive Directors, members of the Executive Committee, including the Company Secretary and their Persons Closely Associated. Details of share awards granted during the year and held as at 10 February 2023 by members of senior management are as follows:

|  | Share awards granted during the year | Total share awards held as at 10 February 2023 |
| --- | --- | --- |
| Equity Incentive Programme awards | 0 | 99,066 |
| Deferred Share Bonus Plan awards | 161,396 | 108,506 |
| Performance Share Programme awards at maximum | 1,400,882 | 2,121,358 |
| Performance Share Programme - Supplementary awards | 0 | 41,898 |
| Conditional Share Awards under the Global Share Plan 2020 | 126,337 | 229,896 |
| Buy-Out Award Agreement | 441,737 | 205,208 |
| Options under Employee ShareSave plans | 2,135 | 3,756 |

### The Smith+Nephew Employee Share Trust

Note 19.2 of these accounts states the movement in Treasury Shares and the Trust during 2022. No more shares are held within the Trust than are required for the next twelve months' of anticipated vestings. Any unvested shares held in the Trust are not voted upon at shareholder meetings. No more than 5% of the issued share capital at 31 December 2022 is held within the Trust. At 31 December 2022 shares were held in the Trust representing 0.37% of the issued share capital.

### Dilution headroom

The Remuneration Committee ensures that at all times the number of new shares which may be issued under any share-based plans, including all-employee plans, does not exceed 10% of the Company's issued share capital over any rolling 10-year period (of which up to 5% may be issued to satisfy awards under the Company's discretionary plans). The Company monitors headroom closely when granting awards over shares taking into account the number of options or shares that might be expected to lapse or be forfeited before vesting or exercise. In the event that insufficient new shares are available, there are processes in place to purchase shares in the market to satisfy vesting awards and to net-settle option exercises.

Over the previous 10 years (2013 to 2022), the number of new shares issued under our share plans has been as follows:

| All-employee share plans | 7,102,563 (0.81% of issued share capital as at 10 February 2023) |
| --- | --- |
| Discretionary share plans | 15,478,364 (1.77% of issued share capital as at 10 February 2023) |

By order of the Board, on 21 February 2023

Chair of the Remuneration Committee

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# Accounts

| Statement of Directors' responsibilities | 147 |
| --- | --- |
| Independent auditor's UK report | 148 |
| Group financial statements | 164 |
| Notes to the Group accounts | 168 |
| Company financial statements | 221 |
| Notes to the Company accounts | 223 |

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## Statement of Directors' responsibilities in respect of the Annual Report and Financial Statements

The Directors are responsible for preparing the Annual Report and Form 20-F and the Group and Parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with UK-adopted international accounting standards and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK accounting standards and applicable law, including FRS 101 Reduced Disclosure Framework. In addition the Directors have also chosen to prepare the Group financial statements in accordance with IFRS as issued by the International Accounting Standards Board (IASB).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:

- Select suitable accounting policies and then apply them consistently;
- Make judgements and estimates that are reasonable, relevant, reliable and prudent;
- For the Group financial statements, state whether they have been prepared in accordance with UK-adopted international accounting standards and IFRS as issued by the IASB;
- For the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements;
- Assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

- Use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

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

In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the financial statements will form part of the annual financial report prepared using the single electronic reporting format under the TD ESEF Regulation. The auditor's report on these financial statements provides no assurance over the ESEF format.

### Responsibility statement of the Directors in respect of the Annual Report

We confirm that to the best of our knowledge:

- The financial statements, prepared in accordance with the applicable set of accounting standards, 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 taken as a whole; and
- The Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

The Strategic Report, which has been prepared in accordance with the requirements of the Companies Act 2006, comprises pages IFC-81.

The Directors' Report, prepared in accordance with the requirements of the Companies Act 2006 and the UK Listing Authority's Listing Rules, and Disclosure Guidance and Transparency Rules, comprising pages 7, 20-21, 29-45, 47, 48-53, 56-68, 69-80, 84, 92-93, 97-100, 103-107, 108-109, 112-115, 197-198, 220, 225-228 and 240-248, was approved by the Board and signed on its behalf. We consider the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

By order of the Board, on 21 February 2023

**Helen Barraclough**
Company Secretary

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KPMG

# Independent auditor's report to the members of Smith & Nephew Plc

# 1. Our opinion is unmodified

In our opinion:

- the financial statements of Smith & Nephew plc give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2022, and of the Group's profit for the year then ended;
- the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;
- the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and
- the Group and Parent Company financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

# What our opinion covers

We have audited the Group and Parent Company financial statements of Smith & Nephew plc ("the Company") for the year ended 31 December 2022 (FY22) included in the Annual Report, which comprise:

Group (Smith & Nephew plc and its subsidiaries)

- The Group Income Statement.
- Group Statement of Comprehensive Income.
- Group Balance Sheet.
- Group Cash Flow Statement.
- Group Statement of Changes in Equity.
Notes 1 to 23 to the Group financial statements, including the accounting policies in note 1.

Parent Company (Smith & Nephew plc)

- Company Balance Sheet.
- Company Statement of Changes in Equity.
Notes 1 to 9 to the Parent Company financial statements, including the accounting policies in note 1.

# Additional opinion in relation to IFRS as adopted by the IASB

As explained in Note 1 to the Group financial statements, the Group, in addition to complying with its legal obligation to apply UK-adopted international accounting standards, has also applied IFRS as issued by the International Accounting Standards Board (IASB). In our opinion, the Group financial statements have been properly prepared in accordance with IFRS as issued by the IASB.

# Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion and matters included in this report are consistent with those discussed and included in our reporting to the Audit Committee ("AC").

We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities.

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## 2. Overview of our audit

# Factors driving our view of risks

Following our FY21 audit, and considering developments affecting the Group since then, we have updated our risk assessment.

Consistent with FY21 audit, we determined Provision for metal-on-metal hip products and Excess and Obsolescence (E&O) provision for Orthopaedics inventory as key audit matters due to a high degree of estimation uncertainty, with a potential range of outcomes greater than our materiality for the financial statements as a whole.

We have identified Recoverability of the Orthopaedics CGU goodwill as a new key audit matter. The profitability of the Orthopaedics business remains below historic levels, which combined with higher input inflation and supply chain challenges means that reasonably possible changes in assumptions could lead to a material impairment.

Parent company financial statements only: Recoverability of Parent Company's investments in subsidiaries - due to their materiality in the context of the Parent Company financial statements as a whole, this is considered to be the area which had the greatest effect on our overall audit strategy and allocation of resources in planning and completing our Parent Company audit.

| Key Audit Matters | Vs FY21 | Item |
| --- | --- | --- |
| Recoverability of the Orthopaedics CGU goodwill | + | 4.1 |
| Provision for metal-on-metal hip products | ↔ | 4.2 |
| Excess and Obsolescence (E&O) provision for Orthopaedics Inventory | ↔ | 4.3 |
| Parent company financial statements only: Recoverability of Parent Company's investment in subsidiaries | ↔ | 4.4 |

# Audit Committee interaction

During the year, the AC met 8 times. KPMG are invited to attend all AC meetings and are provided with an opportunity to meet with the AC in private sessions without the Executive Directors being present. For each Key Audit Matter, we have set out communications with the AC in section 4, including matters that required particular judgement for each.

The matters included in the Audit Committee report on page 101 are materially consistent with our observations of those meetings.

# Our independence

We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities.

We have not performed any non-audit services during FY22 or subsequently which are prohibited by the FRC Ethical Standard.

We were first appointed as auditor of the Company in 2015 following a competitive tender in 2014. The period of total uninterrupted engagement is for the 8 financial years ended 31 December 2022.

This is Paul Nichols first year as a group engagement partner.

The average tenure of partners responsible for component audits as set out in section 7 below is 3.2 years, with the shortest being 1 and the longest being 6.

| Total audit fee | $9.4m |
| --- | --- |
| Audit related fees (including interim review) | $0.4m |
| Non-audit fee as a % of total audit and audit related fee % | 4% |
| Date first appointed | 31 December 2015 |
| Uninterrupted audit tenure | 8 years |
| Tenure of Group engagement partner | 1 year |
| Average tenure of component signing partners | 3.2 years |

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## Independent auditor's UK report continued

### 2. Overview of our audit continued

#### Materiality (Item 6 below)

The scope of our work is influenced by our view of materiality and our assessed risk of material misstatement.

We have determined overall materiality for the Group financial statements as a whole at $35m (FY21: $35m) and for the Parent Company financial statements as a whole at $32m (FY21: $32m).

Consistent with FY21, we determined that adjusted profit before tax remains the benchmark for the Group as we consider it to be the primary measure by which users of the accounts assess the performance of the Group. As such, we based our Group materiality on adjusted profit before tax, of which it represents 5.15% (FY21: 5.13%).

Materiality for the Parent Company financial statements was determined with reference to a benchmark of Parent Company total assets of which it represents 0.3% (FY21: 0.3%).

#### Materiality levels used in our audit

![img-0.jpeg](img-0.jpeg)

#### Group scope (Item 7 below)

We have performed risk assessment and planning procedures to determine which of the Group's components are likely to include risks of material misstatement to the Group financial statements, the type of procedures to be performed at these components and the extent of involvement required from our component auditors around the world.

Of the Group's 121 (FY21: 112) reporting components, we subjected 3 (2021: 6) to full scope audits for group purposes, 33 (FY21: 34) to audits of specific account balances and specified risk focussed audit procedures focussed over revenue, receivables and cash (5 (FY21: 6)), inventory (6 (FY21: 6)) and property, plant and equipment (2 (FY21: 1)). The components within the scope of our work accounted for the percentages illustrated opposite.

In addition, we have performed Group level analysis on the remaining components to determine whether further risks of material misstatement exist in those components.

We consider the scope of our audit, as communicated to the Audit Committee, to be an appropriate basis for our audit opinion.

#### Coverage of Group financial statements

##### Profit before tax

![img-1.jpeg](img-1.jpeg)

##### Total assets

![img-2.jpeg](img-2.jpeg)

##### Revenue

![img-3.jpeg](img-3.jpeg)

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# The impact of climate change on our audit

In planning our audit, we considered the potential impacts of climate change on the Group's business and its financial statements.

The Group has set out in the Strategic Report its commitment to achieving net zero Scope 1 and Scope 2 greenhouse gas emissions (GHGs) by 2040 and Scope 3 GHGs by 2045 and its commitment to several other shorter-term targets.

As a part of our audit, we have performed a risk assessment, including enquiries of management, to understand how the impact of commitments made by the Group in respect of climate change, as well as the physical or transition risks of climate change, may affect the financial statements and our audit. There was no impact of this work on our key audit matters.

Based on the procedures we performed in reviewing and challenging the Group's Road map for transitioning to net zero Scope 1 and Scope 2 GHGs, we did not identify any significant risk in this period of climate change having a material impact on the Group's critical accounting estimates. This is due to the shorter-term nature of certain estimates (inventory provisioning) and the nature of the estimate itself (metal on metal liabilities). In addition, we did not identify any significant risks in this period to the carrying value and useful economic lives of property, plant and equipment or intangible assets caused by the projected physical risks of climate change or the transition to a net zero operating model.

We have read the disclosures of climate related information in the annual report and considered their consistency with the financial statements and our audit knowledge.

# 3. Going concern, viability and principal risks and uncertainties

The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the Parent Company or to cease their operations, and as they have concluded that the Group's and the Parent Company's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ("the going concern period").

# Going concern

We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business model and analysed how those risks might affect the Group's and Company's financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group's and Company's available financial resources and metrics relevant to debt covenants over this period relates to supply chain disruption and macroeconomic factors, including inflation. This could lead to a sustained medium-term decline in revenue and profits.

We also considered less predictable but realistic second order impacts, such as adverse working capital movements, including delays in customer payments, new product liability claims giving rise to significant claims and legal fees, pricing and reimbursement pressures, and currency exchange volatility leading to a long-term decline in revenue and profits.

We considered whether these risks could plausibly affect the liquidity or covenant compliance in the going concern period by comparing severe, but plausible downside scenarios that could arise from these risks individually and collectively against the level of available financial resources and covenants indicated by the Group's financial forecasts.

We considered whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the Directors' assessment of going concern, including the identified risks, and related sensitivities.

# Our conclusions

- We consider that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate;
- We have not identified, and concur with the directors' assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group's or Parent Company's ability to continue as a going concern for the going concern period;
- We have nothing material to add or draw attention to in relation to the directors' statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Parent Company's use of that basis for the going concern period, and we found the going concern disclosure in note 1 to be acceptable; and
- The related statement under the Listing Rules set out on page 84 is materially consistent with the financial statements and our audit knowledge.

However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group or the Parent Company will continue in operation.

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### 3. Going concern, viability and principal risks and uncertainties continued

# Disclosures of emerging and principal risks and longer-term viability

# Our responsibility

We are required to perform procedures to identify whether there is a material inconsistency between the directors' disclosures in respect of emerging and principal risks and the viability statement, and the financial statements and our audit knowledge.

Based on those procedures, we have nothing material to add or draw attention to in relation to:

- the directors' confirmation within the viability statement on page 78 that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
- the Emerging and Principal Risks disclosures describing these risks and how emerging risks are identified and explaining how they are being managed and mitigated; and
- the directors' explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to review the viability statement set out on page 78 under the Listing Rules.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group's and Parent Company's longer-term viability.

# Our reporting

We have nothing material to add or draw attention to in relation to these disclosures.

We have concluded that these disclosures are materially consistent with the financial statements and our audit knowledge.

### 4. Key audit matters

# What we mean

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on:

- the overall audit strategy;
- the allocation of resources in the audit; and
- directing the efforts of the engagement team.

We include below the Key Audit Matters in decreasing order of audit significance together with our key audit procedures to address those matters and our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, for the purpose of our audit of the financial statements as a whole. We do not provide a separate opinion on these matters.

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## 4.1 Recoverability of orthopaedics CGU goodwill (Group)

Financial statement elements

|  | FY22 | FY21 |
| --- | --- | --- |
| Goodwill (Orthopaedics CGU) | $953m | $897m |

Our assessment of risk vs FY21

We have identified recoverability of the Orthopaedics CGU goodwill as a new key audit matter. The profitability of the Orthopaedics business remains below historic levels, which combined with higher input inflation and supply chain challenges means that reasonably possible changes in assumptions could lead to a material impairment.

+ Our results

FY22:
Acceptable

FY21:
Acceptable

Description of the key audit matter

Forecast-based valuation

As discussed in Note 8 to the consolidated financial statements, the goodwill balance as of 31 December 2022 was $3,031 million, of which $953 million related to the Orthopaedics cash generating unit (CGU).

The Group performs an impairment test for goodwill annually, and additionally whenever an indicator of impairment is identified. The recoverable amounts are based on value-in-use which is calculated from pre-tax cash flow projections for three years using data from the Group's budget and strategic planning process and extrapolated for a further two years. The headroom for the Orthopaedics CGU has decreased from $1.1bn in the prior year to $0.6bn in the current year, primarily due to higher input inflation and supply chain challenges.

We identified the recoverability of Orthopaedics CGU goodwill and related disclosure as a key audit matter. Significant auditor judgment was required to evaluate the key assumptions used in the Group's impairment test, specifically the revenue growth rates and trading profit margins. The effect of these matters is that, as part of our risk assessment, we determined that the value in use of goodwill has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (Note 8.4) disclose the sensitivity estimated by the Group.

Disclosure quality

The financial statements (note 8.4) disclose the sensitivity estimated by the Group. These disclosures give relevant information about the estimation uncertainty including the risk of a reduction in the headroom or need for an impairment as a result of a reasonably possible change in one or more of the key assumptions.

Our response to the risk

Our procedures to address the risk included:

- Control operation: We evaluated the design and implementation and tested the operating effectiveness of certain internal controls over the Group's goodwill impairment process, including controls over the key assumptions.
- Benchmarking assumptions and historical comparison: We assessed the revenue growth rates and trading profit margins assumptions by comparing them to external industry forecasts; and analysts' reports.
- Our sector experience: We involved valuations experts with specialised skills and knowledge, who assisted in developing a range of Orthopaedics CGU enterprise values using market based valuation techniques and compared their results to the value in use valuation calculated by management.
- Sensitivity analysis: we performed a sensitivity analysis over the key assumptions listed to the left to assess the impact on the value in use.
- Historical comparisons: We evaluated the Group's ability to forecast the cash flow projections by comparing historical actual results to the approved budgets in the previous years.
- Assessing transparency: We assessed whether the Group's disclosures about the sensitivity of the outcome of the impairment assessment to a reasonably possible change in the key assumptions listed to the left, reflects the risks inherent in the estimation of the recoverable amount of goodwill.

Communications with the Smith & Nephew plc Audit Committee

Our discussions with and reporting to the Audit Committee included:

- Our risk assessment and planned substantive procedures and the extent of our control reliance.
- The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.

Areas of particular auditor judgement

We identified the following as the areas of particular auditor judgement:

- Assumptions used by management in the value in use calculation relate to the revenue growth rates and trading profit margins.

Our results

We found the Group's conclusion that there is no impairment of Orthopaedics CGU's goodwill to be acceptable (2021: acceptable) and we found the sensitivity disclosures made to be acceptable (2021: acceptable).

Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the Audit Committee considered Impairment of Goodwill attributable to Orthopaedics CGU as an area of significant attention, page 170 for the accounting policy on Impairment of Goodwill attributable to Orthopaedics CGU, and note 8 for the financial disclosures.

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## 4. Key audit matters continued

### 4.2 Provision for metal-on-metal hip products (Group)

#### Financial statement elements

|  | FY22 | FY21 |
| --- | --- | --- |
| Provision for metal-on-metal hip products | $239m | $289m |

#### Our assessment of risk vs FY21

Our assessment is that the risk is similar to FY21. We identify provision for metal-on-metal hip products to be a key audit matter due to a high degree of estimation uncertainty involved.

Our results

**FY22: Acceptable**
FY21: Acceptable

#### Description of the key audit matter

##### Subjective estimate

As discussed in note 17.1 to the consolidated financial statements, the Group holds a provision of $239 million (FY21: $289 million) relating to the present value at 31 December 2022 of the estimated costs to resolve all other known and anticipated metal-on-metal hip claims globally.

The estimate for this provision requires the Group to use an actuarial model and make a number of key assumptions relating to the number of claimants and settlement outcomes. We identified the evaluation of the provision for metal-on-metal hip products and related disclosure for these potential liabilities as a key audit matter because especially challenging auditor judgement and specialised skills and knowledge was required in assessing the key assumptions above. Minor changes to these assumptions would have a significant effect on the provision.

#### Our response to the risk

##### Our procedures to address the risk included:

- **Control operation:** We evaluated the design and implementation and tested the operating effectiveness of certain internal controls over the Group's legal provision process. This included controls related to the Group's review, challenge and assessment of the metal-on-metal provision and related key assumptions including estimating the number of claimants and the settlement outcomes.
- **Enquiry of lawyers:** We obtained correspondence directly from the Group's external counsel on the status of open metal-on-metal court proceedings and settlement negotiations. We compared the number of open metal-on-metal claims per the Group's records against this correspondence, and considered any relevant information provided in our evaluation of the related exposure.
- **Our actuarial expertise:** We involved actuarial specialists with relevant skills and knowledge, who assisted in challenging the number of claimants and settlement outcomes used in statistical projections in determining the provision, as well as the range of reasonably possible outcomes determined by the Group, by reference to historical data including settlement amounts, number of new claimants, and experience of other cases. In addition, the actuarial professionals assisted in evaluating the statistical model applied by the Group with actuarial professional standards and industry practice for similar product liability claims. We evaluated the scope, competency, and objectivity of the Group's experts involved in developing the actuarial model used in the determination of the provision by considering the work they were engaged to perform, their professional qualifications, and reporting lines.
- **Assessing disclosures:** We assessed the Group's sensitivity disclosures in respect of the metal-on-metal hip provision over how sensitive the provision is to changes in the key assumptions and how the range of possible outcomes reflect the underlying facts and circumstances.

#### Communications with the Smith & Nephew plc Audit Committee

Our discussions with and reporting to the Audit Committee included:

- Our approach to the audit of the provision for metal-on-metal hip including details of our planned substantive procedures and the extent of our control reliance.
- Our conclusions on the appropriateness of Smith & Nephew plc's provisioning methodology and policy.
- The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.

##### Areas of particular auditor judgement

We identified the following as the areas of particular auditor judgement:

- Assumptions relating to the number of claimants and settlement outcome, which are used in the actuarial model

##### Our results

We found the level of provisioning in respect of metal-on-metal hip products to be acceptable (FY21: acceptable).

Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the Audit Committee considered the Provision for metal-on-metal hip products as an area of significant attention, page 170 for the accounting policy on Provision for metal-on-metal hip products, and note 17.1 for the financial disclosures.

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### 4.3 Excess and obsolescence (E&O) provision for orthopaedics inventory (Group)

Financial statement elements

|  | FY22 | FY21 |
| --- | --- | --- |
| E&O Provision for Orthopaedics inventory | $504m | $430m |

Our assessment of risk vs FY21

Our assessment is that the risk is similar to FY21. We identify E&O provision for Orthopaedics inventory to be a key audit matter due to a high degree of estimation uncertainty involved.

Our results

FY22: Acceptable
FY21: Acceptable

Description of the key audit matter

Subjective estimate

As discussed in notes 1.2 and 12 to the consolidated financial statements, the Group's total E&O provision is $504 million (FY21: $430 million), approximately 80% of which is related to Orthopaedics. The Group has high levels of Orthopaedics inventory that is available for customers' immediate use. Complete sets of products including large and small sizes of inventory (which are used less frequently) have to be available to customers at their premises. An assessment is made by the Group to identify excess or obsolete inventory. The key input into this provision is the estimate of the forecasted usage of inventory on hand.

There is a high degree of subjectivity in assessing a number of the assumptions applied by the Group in calculating the future utilisation of inventory. Future utilisation which is based on assumptions of historical sales of inventory adjusted for other internal or external factors such as effectiveness of inventory deployment, length of product lives and planned phase out of products which may impact the demand for the product.

The effect of these matters is that, as part of our risk assessment, we determined that the provision has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole over the longer term.

Our response to the risk

Our procedures to address the risk included:

- **Control operation:** We evaluated the design and implementation and tested the operating effectiveness of certain internal controls over the Group's process for assessing the E&O provision, including controls over the key assumptions used to determine forecasted usage of Orthopaedics inventory.
- **Test of detail:** We assessed and challenged the key assumptions used to determine the E&O provision through a combination of interviews of both finance and operations personnel and inspection of internal budgets, including a selection of product plans to assess the impact of plans for phasing out product lines on forecasted usage of Orthopaedics inventory.
- **Historical comparisons:** We evaluated the Group's ability to accurately estimate the E&O provision by comparing historically recorded provisions to actual inventory write-offs and historic estimates of forecasted usage to actual usage.
- **Sensitivity analysis:** We assessed the sensitivity of the key assumptions, listed to the left, incorporating the recent volatility in sales of inventory, to consider their impact on the Group's determination of the provision recognised.
- **Assessing disclosures:** We assessed the adequacy of the Group's disclosures in respect of the E&O provision.

Communications with the Smith & Nephew plc Audit Committee

Our discussions with and reporting to the Audit Committee included:

- Our approach to the audit of E&O provision including details of our planned substantive procedures and the extent of our control reliance.
- Our conclusions on the appropriateness of Smith & Nephew plc's provisioning methodology and policy.
- The adequacy of the disclosures, particularly as it relates to the level of estimation uncertainty involved.

Areas of particular auditor judgement

We identified the following as the areas of particular auditor judgement:

- Assumptions used by management in relation to future utilisation of provision.

Our results

We considered the level of E&O provisions for orthopaedics inventory to be acceptable (FY21: acceptable).

Further information in the Annual Report and Accounts: See the Audit Committee Report on page 102 for details on how the Audit Committee considered E&O provision for Orthopaedics Inventory as an area of significant attention, page 169 for the accounting policy on E&O provision for Orthopaedics Inventory, and note 12 for the financial disclosures.

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## 4. Key audit matters continued

### 4.4 Recoverability of Parent Company's investment in subsidiaries (Parent Company only)

#### Financial Statement Elements

|  | FY22 | FY21 |
| --- | --- | --- |
| Investments in subsidiaries | $7,092m | $7,092m |

#### Our assessment of risk vs FY21

There are no significant new factors, which affected our risk assessment in FY22 and the risk level is unchanged as compared to FY21.

#### Our results

**FY22: Acceptable**
FY21: Acceptable

#### Description of the key audit matter

##### Low risk, high value

The carrying amount of the Parent Company's investments in subsidiaries held at cost less impairment represents 69% (FY21: 64%) of the Parent Company's total assets.

We do not consider the valuation of these investments to be at a high risk of significant misstatement, or to be subject to a significant level of judgement. However, due to their materiality in the context of the Parent Company financial statements as a whole, this is considered to be the area which had the greatest effect on our overall audit strategy and allocation of resources in planning and completing our Parent Company audit.

#### Our response to the risk

We performed the tests below rather than seeking to rely on any of the Company's controls because the annual assessment meant that detailed testing is inherently the most effective means of obtaining audit evidence.

##### Our procedures to address the risk included:

- **Test of detail:** Comparing a sample of the highest value investments representing 98% (FY21: 98%) of the total investment balance with the relevant subsidiaries' draft balance sheets to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making.
- **Assessing subsidiary audits:** Assessing the work performed by the subsidiary audit teams on that sample of subsidiaries and considering the results of their work on those subsidiaries' profits and net assets.

#### Communications with the Smith & Nephew plc Audit Committee

Our discussions with and reporting to the Audit Committee included:

- Our audit response to the Key Audit Matter which included challenge of the key aspects of management's impairment assessment and the range of reasonably possible alternatives for significant assumptions.

#### Areas of particular auditor judgement

There are no areas of significant auditor judgement in relation to this Key audit matter.

#### Our results

We found the Directors' assessment of the recoverability of the investment in subsidiaries to be acceptable (FY21: acceptable).

Further information in the Annual Report and Accounts: See page 223 for the accounting policy on Recoverability of Parent Company's investment in subsidiaries, and page 223 for the financial disclosures.

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## 5. Our ability to detect irregularities, and our response

| Fraud - Identifying and responding to risks of material misstatement due to fraud |  |
| --- | --- |
| Fraud risk assessment | To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: - Enquiring of directors, the Audit Committee, internal audit, compliance officers and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Group’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud. - Reading Board and all relevant committee minutes. - Inspecting management’s own fraud risk assessment and considering the applicability of identified risk factors. - Considering remuneration incentive schemes (primarily the annual bonus plan) and performance targets for management and directors, including revenue and trading margin targets for management remuneration. - Using analytical procedures to identify any unusual or unexpected relationships. - Using our own forensic specialists to assist us in identifying fraud risks based on discussions of the circumstances of the Group and Company. |
| Risk communications | We communicated identified fraud risk factors throughout the audit team and remained alert to any indications of fraud throughout the audit. This included communication from the Group audit team to all in-scope component audit teams of relevant fraud risk factors identified at the Group level and request to component audit teams to report to the Group audit team any instances of fraud that could give rise to a material misstatement at the group level. |
| Fraud risks | As required by auditing standards and taking into account our overall knowledge of the control environment, we perform procedures to address the risk of management override of controls, in particular the risk that Group and component management may be in a position to make inappropriate accounting entries and the risk of bias in accounting estimates and judgements such as inventory provisioning. On this audit we do not believe there is a fraud risk related to revenue recognition based on the following assessment: - The accounting for the majority of the Group’s sales is non-complex, and subject to limited levels of judgement with limited opportunities for manual intervention in the sales process to fraudulently manipulate revenue. There is also a short period of time between order and delivery. - Revenue related rebates and deductions are relevant for sales made to distributors in certain markets, and the calculation of these includes a level of estimation which may be subject to management bias. However, given the materiality of the respective accruals, their contractual terms, and the historic profile of these deductions, including frequency of settlement, we are satisfied that there is no significant risk of fraud associated with these sales. - We are also satisfied that there are no significant risks around fraudulent sales to distributors, including channel stuffing, given the materiality of these arrangements, number and size of agreements and levels of channel inventory. We did not identify any additional fraud risks. |
| Procedures to address fraud risks | In determining the audit procedures, we considered the results of our evaluation and testing of the operating effectiveness of the Group-wide fraud risk management controls. We also performed procedures including: - Identifying journal entries and other adjustments to test for all full scope components based on specific risk-based criteria and comparing the identified entries to supporting documentation. These included those posted by senior finance management, those posted to unusual accounts, and those with missing user identification; and - Assessing significant accounting estimates for bias. |

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## 5. Our ability to detect irregularities, and our response continued

| Laws and regulations - Identifying and responding to risks of material misstatement relating to compliance with laws and regulations |  |
| --- | --- |
| Laws and regulations risk assessment | We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We engaged forensic specialists to assist in the review of relevant correspondence and attend discussions with management on relevant matters. As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity's procedures for complying with regulatory requirements. |
| Risk communications | We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group audit team to all in-scope component audit teams of relevant laws and regulations identified at the Group level, and a request for component auditors to report to the group audit team any instances of non-compliance with laws and regulations that could give rise to a material misstatement at the Group level. |
| Direct laws context and link to audit | The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. |
| Most significant indirect law/regulation areas | Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group's license to operate. We identified the following areas as those most likely to have such an effect: Food and Drug Administration regulations in the US and the compliance of business practices with the UK Bribery Act and the US Foreign Corrupt Practices Act recognising the regulated nature of the Group's activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. |
| Actual or suspected breaches discussed with AC | We discussed with the Audit Committee other matters related to actual or suspected breaches of laws or regulations, for which disclosure is not necessary, and considered any implications for our audit. |
| Context |  |
| Context of the ability of the audit to detect fraud or breaches of law or regulation | Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of fraud, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations. |

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