Governance
Report of the Directors

The Directors present their report and audited financial statements for the 52 weeks to 25 March 2006.

Principal activities and review of performance

The Company's principal activities are grocery and related retailing and financial services. A review of the performance of the Company and its principal operating subsidiaries during the period is set out in the Financial Review of this Report.

Dividends

The Directors recommend the payment of a final dividend of 5.85 pence per share (2005: 5.65 pence), making a total dividend for the year of 8.00 pence per share (2005: 7.80 pence). Subject to shareholders approving this recommendation at the Annual General Meeting ("AGM"), the dividend will be paid on 21 July 2006 to shareholders on the register at the close of business on 26 May 2006.

Changes to the Board

Darren Shapland was appointed Chief Financial Officer on 1 August 2005 and Dr John McAdam was appointed Senior Independent Director on 1 September 2005. Anna Ford joined the Board as a Non-Executive Director on 2 May 2006. Roger Matthews retired as Finance Director on 24 June 2005 and June de Moller retired from the Board on 1 September 2005 having served two three-year terms as a Non-Executive Director. Bridget Macaskill will step down from the Board following the AGM.

In accordance with the Articles of Association Darren Shapland, John McAdam and Anna Ford, who were appointed since the last AGM, will retire and seek election. Full biographical details of the current Directors are set out within 'Board of Directors'.

Annual General Meeting

The AGM will be held on Wednesday 12 July 2006 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am. The Chairman's letter and the Notice of Meeting accompany this Report, together with notes explaining the business to be transacted at the meeting.

At the meeting, resolutions will be proposed to declare a final dividend, receive the Report and Accounts and approve the Remuneration Report, to elect Directors and to re-appoint PricewaterhouseCoopers LLP as Auditors. In addition, shareholders will be asked to approve a new Long-Term Incentive Plan and a new Deferred Annual Bonus Plan, renew the general authority of the Directors to issue shares (together with the authority to issue shares without applying the statutory pre-emption rights), and authorise the Company to make market purchases of its own shares. No such purchase has been made during the last financial year. Other resolutions propose the renewal of the authority to make 'political donations' as defined by The Political Parties, Elections and Referendums Act 2000.

Share capital

Ordinary shares

Details of the changes to the issued ordinary share capital are shown on within 'Notes to the Financial Statements'.

B Shares

At the Extraordinary General Meeting held on 12 July 2004, shareholders approved a Return of Capital to shareholders by way of a B Share Scheme. A total of 1,943,173,266 B Shares were issued on 19 July 2004. During the year 2005/06 shareholders holding 27,197,589 B Shares elected to redeem them, leaving a balance of 34,418,255 B Shares in issue.

Shareholders may choose to redeem their B Shares on 18 July 2006 and 18 January 2007. To do so, shareholders must give notice to the Company by 30 June 2006 for redemption in July 2006 and by 2 January 2007 for redemption in January 2007. The final redemption date for B Shares is 18 July 2007.

Deferred shares

The 320,050,073 deferred shares created on 19 July 2004 were redeemed and cancelled by the Company at the close of business on 13 May 2005 for a total consideration of one pence in accordance with the terms and conditions of the Return of Capital circular issued to shareholders in June 2004.

Major interests in shares

As at 16 May 2006, the Company had been advised of the following notifiable interests in its shares:

Judith Portrait is a trustee of various settlements, including charitable trusts and the blind trust for Lord Sainsbury of Turville. As at 16 May 2006, notified holdings of these trusts amounted to 17 per cent of the Company's issued share capital.

As at 16 May 2006, the notifiable interests, held beneficially and as trustees of charitable and other trusts, of Lord Sainsbury of Preston Candover KG and the Hon Simon Sainsbury were 3 per cent respectively.

The above disclosures include duplication.

In addition as at 16 May 2006, the following interests had been notified to the Company:

Going concern

The Directors confirm that they are satisfied that the Company has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Directors' interests

The beneficial interests of the Directors and their families in the shares of the Company are shown within the Renumeration report. During the year, no Director had any material interest in any contract of significance to the Group's business.

Directors' indemnities

The Directors are entitled to be indemnified by the Company to the extent permitted by law and the Company's Articles of Association in respect of all losses arising out of or in connection with the execution of their powers, duties and responsibilities.

Market value of properties

The Directors believe that the aggregate open market value of Group properties exceeds the net book value of £5 billion by a considerable margin.

Employees, corporate responsibility and the environment

Sainsbury's has a strong record in its commitment to corporate responsibility, which is an everyday part of how the Company does business. Details of the Company's principal corporate responsibility initiatives and activities are set out within 'Our commitment to communities'. The Company's Corporate Responsibility Report, which will be published on the internet in June (www.j-sainsbury.co.uk/crreport), provides a comprehensive statement on corporate responsibility and describes the Company's policies and activities in respect of customers, colleagues, suppliers, investors, the community and the environment.

The Company has well developed policies for fair and equal treatment of all employees, employment of disabled persons and colleague participation.

The Company's quarterly, interim and annual results are presented to all senior management and are communicated to all colleagues.

Colleagues have always been encouraged to hold shares in the Company and over 48,000 colleagues are shareholders directly or through the Commitment Shares Plan Trust or the Sainsbury's Share Purchase Plan Trust.

Policy on payment of creditors

The policy of the Company and its principal operating companies is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms on the timely submission of satisfactory invoices. The Company is a holding company and therefore has no trade creditors. Statements on the operating companies' payment of suppliers are contained in their accounts.

Donations

During the year, cash and in-kind donations to charitable organisations and other community projects totalled £5.6 million (2005: £6.8 million). In addition, our Active Kids scheme donated £12.5 million (at cost) to schools and the Company made significant contributions to other community related initiatives. Sainsbury's colleagues, customers and suppliers raised £3.25 million (2005: £10.9 million including Comic Relief and the Asian Tsunami appeal) for charities such as Home-Start and the Children's Society, through events supported by the Company.

The Company does not make donations to political parties. During the year, Sainsbury's Bank seconded a member of its staff who would otherwise have been made redundant to Scotland's Futures Forum for a four-month period. This is a think-tank that engages with the public on the future of Scotland in a non party political forum. The salary of the seconded individual during this period amounted to around £24,600. Because of the wide definition under the relevant legislation, this could be interpreted as a donation to an 'EU Political organisation' requiring disclosure.

By order of the Board

Tim Fallowfield
Company Secretary

16 May 2006

Major interests in shares – subsequent disclosure

On 23 May 2006, the Company was advised that Judith Portrait's notifiable interest in the Company's shares had decreased to 15 per cent of the Company's issued share capital.