Northern Rock's Business

Mission Vision and Values

Company Strategy

Northern Rock is a specialised lender providing residential mortgages, secured commercial lending and personal finance. We obtain funds from both on-shore and offshore personal savings, wholesale money markets, covered bonds and from the securitisation of mortgage assets.

Northern Rock's strategy encompasses efficiency, growth and value for both customers and shareholders.

Efficiency is paramount to this business strategy. Cost efficiency is enhanced by low cost, effective distribution and enables competitive pricing. Capital efficiency is achieved by optimising the use of debt and equity capital.

By growing lending and improving the mix of higher margin products, Northern Rock aims to grow earnings and improve returns to shareholders, at the same time as providing innovative and consumer friendly products to our customers.

Northern Rock Mission Statement

Northern Rock is a specialised lending and savings bank which aims to deliver superior value to customers and shareholders through excellent products, efficiency and growth.

Corporate Social Responsibility Policy

CSR has emerged as an aspect of management that requires companies to provide specific focus and public reporting of activities. The outcomes are subject to scrutiny, assessment and comment by external parties. Northern Rock has embraced CSR as a function of good management and has a comprehensive policy to cover current and future topics on the CSR agenda.

Approach

The existence of a framework to capture and report on CSR activities within the Company allows us to promote CSR in keeping with our business objectives and, in addition, to allow the review and control of risks associated with poor CSR performance. CSR is a visible function of management and we can demonstrate that it is part of our normal business activities.

Northern Rock is a well-managed company and we already have many CSR elements in place. Through the work of the CSR Section within Premises and the cross functional CSR Group a framework has been established to promote, capture and report our CSR activities.

The key content headings listed in the policy statement encompass further policies and practices already in place or being developed within the Company.

Corporate Social Responsibility Policy

At Northern Rock we will conduct all of our business operations in a fair and balanced manner, respecting and responding to legal, social and ethical issues arising from our commercial activities.

We will demonstrate our commitment to continuous improvement in Corporate Social Responsibility by acting as good corporate citizens, controlling and minimising our direct and indirect social and environmental impacts.

This policy extends to relationships with all of our stakeholders, including customers, shareholders, employees, suppliers, joint venture partners and subsidiaries.

To support our aim of being an “employer of choice”, we will provide our employees with a comfortable, safe and healthy working environment whilst promoting personal development, job enrichment and work-life balance.

We expect all of our employees to respect our stakeholders, the wider communities in which we operate and the natural environment.

Through the Northern Rock Foundation, which receives 5% of annual pre-tax profits, we will support communities and charitable causes based mainly though not exclusively, in the North East and Cumbria .

Policy and procedures in general will include social responsibility and sustainability issues as appropriate. We will identify, monitor, measure, review and report on our performance and policies in the following areas:

Governance and Accountability
Business Ethics and Human Rights
Workplace
Marketplace
Community
Environment

We believe that the implementation of this policy will contribute to achieving superior value for our customers and shareholders.

Corporate Social Responsibility – Statement

In each area of CSR we are aiming to provide:

Executive input and influence in CSR development
Enhanced brand image and reputation
Improved financial performance
Stakeholder engagement
Measurement and transparency

The broad topics covered by each area is identified below although there are a number of cross-overs between sections.

Governance and Accountability

Board and leadership responsibilities
Compliance and Best Practice
Role of Stakeholders
Monitoring and reporting

Business Ethics and Human Rights

Financial and accounting integrity
Privacy and security
Compliance and best practice
Due diligence towards business partners
Socially responsible investment, operations and advertising
Human Rights

Workplace

Working environment and Health and Safety
Employee rights
Conditions and benefits of employment
Employee involvement

Marketplace

Supplier management
Complaint handling
Customer loyalty and retention
Business continuity
Diversity and access

Community

Northern Rock Foundation
Role in the community
Impact of community programmes
Contributions, including money, time etc.

Environment

Compliance with legislation
Managing environmental risk
Employee awareness and involvement
Objectives and targets

The Management Structure

A Management Structure is in place within the Company to support our Corporate Social Responsibility activities.

The Board Member responsible for Corporate Social Responsibility within Northern Rock is David F Baker, Deputy Chief Executive.

The Executive Committee and Main Board receives periodic reports on corporate CSR activities and performance that have taken place during the "reporting period" and of future proposals and targets.

Northern Rock Operations

Northern Rock Building Society was formed on 1 July 1965 as a result of the merger of Northern Counties Permanent Building Society (established in 1850) and Rock Building Society (established in 1865). Northern Rock Building Society then merged with a number of small local building societies and, prior to its conversion to a public limited company in October 1997, was an amalgamation of 53 societies. The conversion also resulted in the establishment of The Northern Rock Foundation, a charitable body which is entitled to receive approximately 5% of the annual consolidated profit before tax of Northern Rock plc.

Northern Rock is currently the 5th largest UK mortgage lender, the largest financial institution based in the North East of England and one of the most cost efficient UK mortgage lenders based on key performance ratios

Northern Rock is regulated by the Financial Services Authority.

Core Business

Northern Rock is a specialised lender, whose core business is the provision of UK residential mortgages funded in both the retail and wholesale markets. It also provides secured commercial lending and personal unsecured lending products.

Residential mortgage and retail savings products are distributed to retail customers through a diversified distribution network with an emphasis on cost efficiency. The network consists of around 70 branches and mortgage centres, postal, telephone and Internet operations. A large proportion of residential mortgage business is sourced through the extensive UK financial intermediary market

Northern Rock currently lends within the United Kingdom and raises funding worldwide

Corporate Citizenship

Northern Rock recognises that there is a direct correlation between our everyday operation and activities and our wider social and environmental conduct. The concept of being a good corporate citizen is fundamental to Northern Rock and we have embodied this principle into our staff employment, training and welfare.

In addition, we have a history of supporting local community and charitable causes. This has been achieved largely by the creation of The Northern Rock Foundation .and continues into the everyday contributions by our staff on a voluntary and company-assisted basis.

Building on this Community Report, the Company will continue to promote greater transparency of our corporate activity in this area.

Stakeholder Engagement

Northern Rock has a policy of active communication and as part of this process management are regularly engaged in verbal, face to face and written communications with the following stakeholders:

Customers
Employers
Shareholders
Government Offices
Regulatory Agencies
Non Government Organisations
Analysts
Media
Suppliers
Local Community Groups

Guidance from the United Kingdom Listing Authority (UKLA) is followed in respect of matters concerned with listing on the Stock Exchange and the FSA's (Financial Services Authority) interpretation of the various provisions of the Listing Rules.

The guidance is based on the premise that communication between companies and the market is desirable and should be of positive benefit to both. It recognises the value to both companies and the market of a dialogue between analysts and a company that builds up a view of a business's potential.

Further information with regard to Investor Relations may be obtained from the Company's Investor Relations Department and our Corporate web site.

Media related enquiries should be directed to our Corporate Relations Department.

Value Added Scoreboard

Value Added Scoreboard 2006
The fifth Value Added Scoreboard was produced by the Department of Trade and Industry (DTI) during 2006 using 2005 data (taken from the sets of company annual accounts current on 6th Jan 2006).

Value Added is the wealth created by the activities of a company and is defined as sales less the cost of bought-in materials, components and services. It can be calculated from a company's audited accounts.

The 2006 Value Added Scoreboard lists the Value Added (VA) for the top 700 European companies and the top 800 UK companies together with extensive financial data and key ratios. The Scoreboard shows by how much these companies have increased their VA and records the efficiency with which they create wealth.

Northern Rock was pleased to be approached by the DTI to provide an Executive Commentary for the 2006 Scoreboard. This was provided by our Chief Executive Adam Applegarth.

Value Added is distributed to employees, as returns to the providers of capital, taxes to governments, and as investment to develop and grow the company.

It is an output measure of the wealth created by the activities of a company and is distributed in four main ways:

Rewards to the providers of capital (loans and equity)
Compensation for employees who provide the necessary skills
Taxes for governments
Investment to sustain and develop the business (e.g. research and development for new products and services)

Northern Rock is pleased that the DTI exercise has produced a favourable benchmark for Northern Rock in its 2006 report and we believe that is a reflection of productivity, control and management by our staff.

In the exercise Northern Rock was ranked at 168 in the largest 800 UK Companies by Value Added generated in the Scoreboard, an improvement from 194 in the 2005 Scoreboard. Northern Rock was also the 503rd largest company in Europe in the 2006 Scoreboard, an advance from 540th position in 2005.

Growth of Value Added in the year was 14% against a European banking sector average of -13%.
National Average Value Added per employee for the largest 800 UK companies is £52,600. For banks this reaches £104,860 but Northern Rock registered £116,800.
The most favourable performance of all was in Value Added as % of Employment Costs and Depreciation (a ratio called P2), a measure of efficiency and profitability with the result of 396.2% for Northern Rock while the sector average was 214.9% and National Average was 160.8% This means that Northern Rock creates almost £4 of wealth for every £1 of costs compared to the banking sector as a whole which creates £2.2 for every £1 of costs.
The DTI states that “Successful companies consistently achieve a high P2 within their sector coupled with rising VA and sales.”

NB The chart used in the Northern Rock report uses simple averages, whilst the averages used in the Scoreboard document calculates the sector P2 as all the VA divided by all the costs.

In addition, we are particularly pleased that in the 2006 Scoreboard, Northern Rock was cited as one of the higher performing UK-owned Companies in both 2003 & 2006 (see pages 82-3 of the Scoreboard) – a confirmation that the Company has a respected brand, clear products and uses our staff and assets effectively to create wealth and thus achieve a sustainable performance for our stakeholders.

Further details on the Value Added Scoreboard can be found at:
Department of Trade and Industry (DTI)

http://www.innovation.gov.uk/value_added/default.asp?page=62

The Definition, Calculation and Use of Value Added can be found at:

http://www.innovation.gov.uk/value_added/default.asp?page=18

Executive Commentary by Adam Applegarth, Chief Executive of Northern Rock plc can be found at:

http://www.innovation.gov.uk/value_added/default.asp?page=8

EIRIS

During 2006 EIRIS sent companies 2 surveys covering environmental and social issues.

Environmental –

information on environmental policy, management systems, reporting and performance data

Social – information covering governance, ethics and stakeholder relations

These were both completed by Northern Rock.

David Tozer Head of the Governance Team and Franziska Jahn Senior Governance Team Researcher of EIRIS stated:

“Socially responsible investors will be encouraged to see the continuing efforts made by the company to address a number of the issues faced by companies in this sector, such as customer related issues or controversial practices i.e. money laundering. Northern Rock completed EIRIS' surveys covering environmental, social and governance issues. Northern Rock has for example demonstrated improvements in relation to key environmental performance indicators. Information supplied to EIRIS was also considered in the FTSE4Good listing review.”

In the EIRIS Company Profile Mailing 2006 Northern Rock received the following assessments in the areas of social and environmental performance:


Board Practice	All of the core governance elements Separates the roles of chairman and chief executive More then 33% of the board are independent non-executives – seven out of twelve directors are non-executives, all of whom are independent Has an audit committee, the majority of whose members are independent non-executives – all six members are independent non-executive directors Discloses the remuneration of company directors.
Bribery and Corruption	Clear policy and procedures on addressing the issues of bribery and corruption.
Code of Ethics	Advanced level Code of Ethics Intermediate Code of Ethics System Clearly communicates a Code of Ethics
Disclosure	Has responded to the environmental, governance and social surveys sent out to companies in 2004 and 2005.
Responsibility for Stakeholders	Northern Rock has allocated board responsibility to specific board members for: Employee related issues External stakeholder issues Environmental Issues
SEE Risk Management	Good board/senior management engagement with SEE risk and opportunities. Scoring 10 out of 16 overall on the basis of individual scores.
Women on the Board	Two women on the board of 12 directors – less than 20% of board members. Both female directors are non-executives.
Human Rights Overall	0 countries of operation listed in Category A 0 countries of operation listed in Category B
Environmental Policy	Good environmental policy and commitment (medium impact)
Environmental Management System	Exceptional Environmental Management System
Environmental Reporting	Exceptional environmental reporting (medium impact)
Environmental Performance	Major improvement in the areas of Climate Change/CO2/Energy and Water Consumption. No improvement on Waste.
Greenhouse gases	Develops or uses renewable energy
Stakeholder Policy	Good level of overall stakeholder policy
Stakeholder Systems	Provided details of a good level of overall stakeholder systems
Stakeholder Engagement	Provided good disclosure of its systems for engaging with stakeholders
Stakeholder Reporting	Disclosed good quantitative indicators to support social reporting.
Equal Opportunities and Diversity Policies	Good commitment to promoting equal opportunities or diversity.
Systems and practices to support Equal Opportunities and Diversity Polices	The Company has very clear evidence of systems for promoting equal opportunities or diversity.
Health and Safety	No convictions for health and safety offences Clear evidence of health and safety systems
Job Creation and Security	Disclosed clear evidence of systems for advancing job creation and job security.
Trade Unions and Employee Participation	Disclosed clear evidence of systems for managing employee/union relations.
Training	Disclosed clear evidence of systems for promoting employee training and development
Customer/Supplier Relations	Northern Rock has adopted and clearly communicates a corporate policy statement setting our details of its policy for managing relationships with suppliers and/or customers. Clear evidence of management systems for managing and improving relationships with customers and suppliers
Community Involvement	Northern Rock has disclosed very clear evidence of systems for promoting community involvement

FTSE4GOOD

Launched in 2001, Northern Rock has always been included in the UK European and Global Indices. Index Listings were again reviewed in 2006 by the FTSE4GOOD Policy Committee and Northern Rock retained its listing.

Pass ratings were received in all applicable areas.

Being a member of FTSE4GOOD Index Series sends a powerful message to our investors and other stakeholders about our company's commitment to responsible business practice. Investors are increasingly concerned with the management of social, environmental and ethical risks in their portfolios. As a constituent member of the FTSE4GOOD Index we are demonstrating that we have the policies and management systems in place to help address these risks.

For further information of the FTSE4GOOD Index Series please refer to the FTSE4GOOD web site.

Times 100

During 2006, Northern Rock engaged with the Times 100 - a case studies resource centre for the National Curriculum GCSE/Applied GSE/BTEC/AS/A2/ Applied GCE AS/A Undergraduate, Scottish Standard, Intermediate, Higher and Advanced Higher coursework. Business studies students and teachers wishing to improve course work, portfolios, research, examinations or homework, can use the website and hardcopy to allow students to improve grades.

The teacher resource centre has a whole area of teaching materials including lesson plans, worksheets, practice exam papers and mark schemes

The material, which is centred on well known businesses, has been designed by teachers and written by respected published authors to cover all the key topic areas.

Pursuing a growth strategy (280 kb pdf)

Northern Rock produced, in conjunction with the Times 100 “Pursuing a growth strategy”

A selection of students comments have included:

‘Investment and innovation are fundamental strategies for success. This is exemplified by the success of Northern rock and its increase in total assets.'
‘I hadn't really read anything about business strategies before so I got a good understanding from this case study.'
‘This case study has shown me that several key strategies are essential to ensure that a business remains competitive and is able to grow successfully. Without a strategy a company wouldn't have a direction in which to move forward and would likely then not fulfil its full potential.'
From reading the Northern Rock case study I have learnt that a strategy has to focus on a goal. With Northern Rock, it aims to keep on growing. It has a simple method which will help it achieve this goal.'
‘I understand now that meeting the needs of your stakeholders is important as they will be benefiting from the growth of the company. The company's growth strategy has to be acceptable to all stakeholders to fit into expectations of what they want in return from the company.'
‘In this case study, it is highlighted that strategies, including growth strategies have to be accepted by stakeholders and fulfil their needs and expectations to be successful. Growth strategies are no exceptions to this, as stakeholders all want to benefit from increased profits and status, which is what growth strategy is driven towards.'
‘Strategies are objectives driven, and in order to achieve a certain objective, a corresponding strategy must be put in place. Northern Rock's growth strategy is two-fold: external growth and internal growth. These strategies will then be broken down into further parts and achievable steps in order to achieve the ultimate objective.'
‘I understand now that Northern Rock is a company that constantly seeks growth in order to meet the needs of stakeholders. This means that it constantly has the needs of its stakeholders in mind when pursuing new strategies and new development.'
“I had heard of Northern Rock, but didn't really know anything about them. I think I have a better opinion of them now however. This study has made me think more about investing money with them compared with other competitors.'
‘I have learnt that each of the Stakeholders has different needs. If all are satisfied then the company is likely to flourish. For example, the employees want job security and good pay. The shareholders want the share price to climb as well as dividends, savers want good rates of interest and security and the government wants everything done legitimately.'
‘Not having heard of Northern Rock before, this case study has informed me of its existence and commitment to quality in terms of banking.'
‘There are two main ways that a company can grow, either by external or inorganic growth, or internal and organic growth. I would like to learn more about which path of growth was more significant to Northern Rock.'
‘I am impressed by the increasing value of Northern Rock's total assets, which have doubled in the last three years. Success in the past often means people are happy with the future as they have gained trust. Good business.'

PRELIMINARY USAGE STATISTICS FOR EDITION 11

	April – 12 Oct 2006
a) Total page impressions and downloads for our study	5,802
b) Case study downloads by students	350
c) Case study downloads by teachers, used with one class of 30 students	2,160
d) Each lesson plan and worksheet, used with one class of 30 students	1,710
e) Web links to further information on our website	1,218
TOTAL EXPOSURE (a+b+c+d+e)	11,240

Please Note: download figures assume one teacher using the Case Study with one class of 30 students.

In reality teachers would normally teach a minimum of three classes in business, these figures are therefore conservative.

f) Ratings of questions based on objectives Yes No

Has this case study improved your opinion of Northern Rock? 79% 21%

Do you now understand more about how growth is driven by meeting stakeholders' needs? 78% 22%

Equity Investors

In addition to verbal engagement, Northern Rock writes on a two-yearly basis to the top 20 equity investors and invites feedback on our Corporate Social Responsibility performance during the year. CSR information is also made available in the Investor Relation information pack on Northern Rock.

Award Nominations

The Newcastle Journal North East Top 200 Companies 2006

Northern Rock is a large, expanding company with international links but we are intensely proud of our North East roots and much of our success is down to home-grown talent. We are fully committed to our heartland and are particularly pleased that our continued successful growth has again taken us to the number one position in the Journal Top 200 table of North East companies.

Northern Rock was pleased to be short-listed in The IR Magazine Awards for Best Practice of Corporate Social Responsibility. The Awards are the definitive measure of IR performance worldwide. Nothing matches the independent and comprehensive research underlying the awards for benchmarking IR best practice.

North East Energy Forum.

Northern Rock is a member of the North East Energy Forum.

The Forum is sponsored by the North East Energy Partnership (NEEP) in association with the Government Office for the North East.

Events provide companies an opportunity to engage with other regional stakeholders interested in energy issues in the North East and to share best practice and to air views to help shape regional priorities and policies.

The Forum provides an opportunity for all attendees to debate energy issues and to decide action, that the individuals, the region and its support bodies and energy partnerships can take forward.

Mortgage Business Expo North 2006

Supported by The Council of Mortgage Lenders and The Association of Mortgage Lenders Intermediaries, Mortgage Business Expo Manchester is the UK 's leading mortgage show for the intermediary market based in the North of England.

The exhibition targets the important community of brokers in the North, as well as providing an opportunity for brokers nationwide. 2,421(ABC audited) visitors attended the show in 2006 making it the largest show of its kind in the North of England.

Held at the G-MEX Centre Manchester between 17 - 18 May 2006, the exhibition was an opportunity for exhibitors to meet and network with northern based brokers and companies and to discuss new products and opportunities in the new regulatory environment.

Northern Rock representatives attended the show, which provided us with an opportunity to engage with Mortgage Brokers, Independent Financial Advisors and Commercial Finance Brokers.

Engagement

Northern Rock has also actively engaged with a number of organisations during the year to further our CSR knowledge and reporting process including:

Pensions Investment Research Consultants Limited (PIRC)
British Bankers Association
Council of Mortgage Lenders
CBI Energy Efficiency Survey
One North East
Aspire
North East Chamber of Commerce
Carbon Disclosure Project
Forest Stewardship Council
Oekom
Research
Environment Agency
DEFRA
Newcastle City Council
Sunderland District Council
London Benchmarking Group
Per Cent Club

2-way engagement has taken place by telephone, face to face and by letter and e-mail.