Learnmoreabouthowweeducate,

Section 1 Introduction05Total shareholder returnThe second element of our return to shareholders – thedividend – increased in real terms once again. For 2008,our total shareholder return (which takes into accountthe share price and dividends paid) was down 8%.Again, this was significantly ahead of the FTSE 100(down 28%), the FTSE Media Sector (down 32%) andthe DJ Stoxx Media (down 40%).Your board considers the dividend to be an extremelyimportant part of its strategy for value creation – a gooddiscipline in terms of our cash generation; a signalabout our confidence in Pearson’s prospects; and a vital,reliable cash distribution to shareholders. In fact, Pearsonhas increased the dividend faster than the rate of inflationfor every one of the past 12 years, returning 2.2bn toshareholders through the dividend over that period.We are proposing a 2008 final dividend of 33.8p.We know that our shareholders, ourselves included,are looking for real growth in value in absolute terms.That is our goal, and while we cannot defy the sharprecent swings in equity markets, we remain clear that themost reliable way to generate that value is by producingconsistent and sustainable growth in Pearson’s earnings,cash flows and return on capital, year after year.Strong position in tough marketsIt is especially pleasing to be able to repeat anobservation that I made last year: that this is not justone year of good performance, but another data pointalong a consistent record of growth.That track record is no accident, but the result of a clearstrategy that we have been steadily pursuing to achieveconsistent and reliable growth in shareholder value.On the first element of that value – the share priceitself – we ended 2008 12% lower than we started it.We’ll never be satisfied with that kind of performancein absolute terms.But our relative performance gives us some comfortthat investors recognise the quality of our business,the strength of our strategy and the consistency of ourgrowth. Because that 12% decline in Pearson’s shareprice compares with much sharper falls elsewhere in aterrible year for equity markets: the FTSE 100 ended theyear 31% lower, the FTSE Media Sector was 34% lowerand the DJ Stoxx Media was 42% lower.While we are very pleased about Pearson’s performancein recent years, none of us is under any illusion: theshort-term outlook is tough and 2009 will be a difficultyear. All kinds of companies, including our own, willbe affected.That said, I do believe that Pearson is in a relativelystrong position. We have good cash flows and a strongbalance sheet, having resisted the fashion for taking oncheap debt during the credit bubble. We have changedthe shape of the company, reducing our exposure tovolatile revenue sources like advertising and movingtowards more resilient ones like subscriptions and longterm service contracts. And, above all, we have focusedthe business on the global market for education, wherethe long-term growth opportunities are very significant.As a result of all those things, I’m as confident as I canbe that Pearson is in good shape to weather thesevery difficult economic conditions. I look forward todiscussing these and any other issues with youat our annual shareholders’ meeting.Glen Moreno Chairman

06Pearson plc Annual report and accounts 2008Our strategyMarjorie Scardino, chief executive‘Genius,’ the inventor of the electric light bulbonce said, ‘is one per cent inspiration andninety-nine per cent perspiration.’We’re keeping that in mind as we try to steerPearson through the dark of this complicatedeconomic environment. We think our strategy isstrong inspiration (though ‘genius’ is certainlynot a word we’d use to describe it). But weknow that it’s really the implementation of itthat matters.Our strategy wouldn’t light up anything withoutthe dedication and perspiration of the 34,000talented people who work here. The strategy’ssuccess is up to them (and they are notdisappointing us).Our strategy has four parts:1 Long-term organic investment in content2 Digital and services businesses3 International expansionto invest through efficiency4 FirepowergainsEducation (in the broadest sense of the word)If you’ve followed this company for the past decade,you know that we’ve set out to become the world’sleading ‘education’ company. By that, we mean thatour objective is to help people make progress in theirlives through more knowledge – to help them to ‘liveand learn’.The part of Pearson that is our formal ‘education’business – serving teachers and students throughschools and colleges in more than 60 countries – nowmakes up a significant majority of our sales, earnings,capital and people. But our goals as an educationcompany are much broader than that.We aim to be an education company that serves thecitizens of a brain-based economy whatever theircircumstances – old or young, at home or at school orat work, in any pursuit, anywhere. We’ve reached morewidely with our education strategy for several reasons:1. Education institutions themselves are more complexthan they used to be. Their success depends on manymore things. Some of those things are not so new –trained teachers, engaging materials, efficientadministration, interested parents. Some are very new –technology that powers it all; assessments and data andanalysis to teach each child in his own way; bridges tothe next stage of learning and on to the world of work.Our strategy is not only to supply many of those parts,but also to make them all work together and work foreveryone involved. The one-dimensional approach toeducation – textbooks only or a test only – is neither agood way to educate nor a good business for us now.2. People don’t just learn in school any more.(They never really did, but education was structuredas if they did.) They learn everywhere. That learning issometimes lost because it’s not connected to academicachievement or work.But they still learn – about their surroundings and thewider world; how to do a better job; how to be a bettercitizen; how to help others. They demand educationthat helps them get a leg up in life, and then educationthat helps them climb further. And often that educationcomes partly outside their degree or their certificationor their job.

Section 2 Our strategyThat’s why our strategy extends to the kind of educationthat the FT has provided to its readers on the globalfinancial crisis; or the kind of education that the PenguinClassics have given to generations of readers. It’s thekind of learning the educator John Dewey might havehad in mind when he said: ‘Education is not preparationfor life; education is life itself.’A ‘full-throated commitment’We’re as sure as we can be that this broad educationmarket we’ve chosen to work in will be a good, long-termgrowth industry.We believe that because the desire for learning, forself-improvement, for the knowledge and skills toachieve our dreams and goals in life, is a fairly universalhuman demand.We believe it also because most governmentsunderstand that the education of their people is whatmakes their country competitive, and most peopleunderstand that education breeds economic andpolitical self-determination.America’s new President often said during his campaignthat his country needed a ‘full-throated commitment topublic education’. Britain’s Prime Minister returned froma trip to China and India last year and said: ‘A generationago a British prime minister had to worry about theglobal arms race. Today a British prime minister hasto worry about the global skills race.’Changing PearsonBeing in good markets is crucial to our business strategy.But it’s not enough. To meet our goals, we have to buildsomething unique into each one of our businesses.We have to have a distinctive way of doing things –or do distinctive things – that set us apart.Each of our businesses takes a slightly differentapproach to distinguishing themselves, but thereare strong common elements across Pearson:Content. An uncomfortable word, and not nearly poeticenough to describe the way we teach and inform and tellstories; but it is descriptive. All around the company weinvest steadily in unique publishing of stories, lessons,information – and we keep replenishing it.Technology and services. We often think that all ourcontent stands alone and is beautiful and perfectlyformed. But we realized some time ago that ‘content’itself isn’t enough in a world where you can pluck itoff the web for free or join with your friends to makeit yourself.07We have to add something that makes it more valuablethan those alternatives.To make our content more useful and enticing, weoften add technology. We now make about a third ofour annual sales from technology-based products andservices, and these are many of our fastest-growingbusinesses. Digital services of one kind or another arefundamental to every part of Pearson today. At the FTGroup, digital services now make up two-thirds of oursales – up from a little over one quarter just eightyears ago. This has been also especially importantin education.But as the educational rules have kept on changing,ways of doing the job and judging success are changingtoo. We’re good at creating, selling and deliveringeducation tools – a textbook, a test, a softwareapplication, a long-term contract. And we can doa lot with the automation technology can offer.But our customers increasingly demand somethingmore – services of a wider kind. Selling ‘things’ to helpeducation is no longer the best approach. We have to dowhat’s required to make each school and each studentsuccessful. They want us to solve their problems.International markets. Though we make about 60% ofour sales in the US, our brands, content and technologytravel well. All parts of Pearson operate in mostdeveloped markets and are also investing in selectedemerging markets, where the demand for informationand education is growing particularly fast. Our‘international’ (meaning ‘outside North America’)education business, for example, has almost doubledits sales over the past five years. Five years ago, it made8% of Pearson’s profits; today it’s approaching 20%.Efficiency. The businesses of Pearson have a lot incommon, in costs, assets, and activities. Pooling thosemakes the company stronger and more efficient. It alsoallows our businesses to learn from each other and tocollaborate to save money.On that basis, we’ve invested for efficiency throughsavings in our individual businesses and through astrong centralised operations structure. We’re integratedin areas where our businesses share the same needs –purchasing, warehousing, distribution, facilities and realestate, project management, people resources, financeand accounting, transactions.Over the past five years we’ve increased our operatingprofit margins from 10.6% to 15.8% and reduced ouraverage working capital as a percentage of sales from29.4% to 26.1%, freeing up cash for further investment.Even so, we can go further.

08Pearson plc Annual report and accounts 2008Our strategy continuedMarjorie Scardino, chief executiveMeasuring upOne of the most important measures of our strategy is,of course, our financial performance. Here, our goal is toproduce hardy, consistent growth in three key financialmeasures – adjusted earnings per share, cash flowand return on invested capital. We believe those are,in concert, good indicators that we’re building thelong-term value of Pearson. So those measures(or others that contribute to them, such as operatingmargins and working capital efficiency) form the basisof our annual budgets and plans, and the basis forbonuses and long-term incentives.Our performance on these measures was strong againin 2008, as you’ll read elsewhere in this report, andwe’re very proud of that. But since our strategy is aboutlong-term performance, not just last year, you need tolook back a little further to see the trends.Over the last five years:we’ve more than doubled our adjusted earningsper share, from 27.5p in 2004 to 57.7p in 2008,an annual growth rate of 20.4%;we’ve almost doubled our operating cash flow from 418m to 796m;we’ve increased our return on invested capital from6.3% to 9.2%, a return above our cost of capital.There’s one other measure that’s especially important tous, too. That’s the cash we return to shareholders eachyear through our dividend. The dividend has grown by anaverage of 6% each year over the last 10 years, and our2008 rise of 7 % will mean that Pearson has increased itsdividend above the rate of inflation for every one of thepast 12 years.

Section 2 Our strategyThe futureThat financial record indicates that our strategy isworking. But a strategy is really good only if it’s flexibleenough to adapt to changes in the battle. This year, we’regoing to face a tough test: while our objectives and ourplans haven’t changed, the world we’re travelling in isnow fundamentally different. We’ve watched the globalfinancial system lurch from crisis to near-catastrophe,and the aftershocks are beginning to make large cracksin the ‘real economy’, that place where most of us livemost of the time.Bookstores were caught up in the same consumerspending gloom that hovered over Main Streets aroundthe world.We have to expect those kinds of pressures – and possiblyothers – to continue in 2009. That’s why we’re beingcautious. We’ve planned for tough economic timesand we’re making tough choices to stay fit for them. and some reasons to be confident But – and this is a very big ‘but’ – we do have realgrounds for confidence, too.As we wade out into 2009, we’re sloshing throughevents that were unimaginable a year ago and are hardto predict even now. Governments and regulators havebecome the centre of our attention, taking bold stepsto stabilize banks, shore up whole industries, stimulatespending and investment and restore confidenceand trust.The lessons of the dot.com bust and the advertisingand technology recession that accompanied it are stillfresh in our minds. Many of us still remember the painsome of our businesses went through in 2001–2003.We all learned some things from that period aboutour vulnerabilities and about acting soonerand more radically.In that context, here’s how I see Pearson’s prospectsnow, and how we’ll approach things through this year.It’s not simple. The truth is, in all my time at PearsonI’ve never been so torn between feeling confident andfeeling cautious. And I’ve never found our outlook forthe coming year as hard to predict as I do today.So over the past few years, we’ve worked hard to makePearson more reliable. We aren’t immune to ructionsin the economy, but we’re very different today than wewere eight years ago. Today we’re more dependent onrepeating subscription or contract revenues and lessdependent on cyclical advertising sales; stronger infaster-growing digital and services markets; muchmore geographically diverse. These changes giveus confidence.Some reasons to be cautious To state the blindingly obvious, a severe and worldwideeconomic contraction inspires caution. You can see theeffects of the contraction pretty much everywhere youlook: in the depressed prices of assets such as property,commodities and shares; in the sorry state of industriesas diverse as financial services, automobiles andretail; in the wobbly financial state of corporations andgovernments; in the conservative spending decisionsof companies, public bodies and individuals; in theconfusion over what to do about all this by justabout everyone.In spite of those events, 2008 was another good yearfor Pearson. We distinguished ourselves through thequality of our publishing, the expansion of our servicebusinesses, and our commitment to being the innovatorin our industries. We also grew and made good profits.But we knew as last year went on that the depressiveforces in the economy would inevitably affect us too insome ways at some point.Most US states, seeing their own incomes fromcorporate and personal taxes dwindle, had to tightentheir girths and rein back their spending on education.Financial institutions, normally important advertisers inthe Financial Times, didn’t have much to shout about(or much spare cash to shout with).09And we have other reasons to be confident, too:We’re in a strong financial position (havingunfashionably resisted the idea that we should takeon a lot of cheap debt during the credit bubble).We’re benefiting from the weakness of the UK pound againstthe US dollar, primarily because we make most of our salesand profits in dollars but report our results in pounds.We’re now a global rather than a largely US or UKcompany, so our geographic diversity gives us widermarkets and less exposure to two challenged economies.We’re in a very strong position relative to our competitors,in industries that face both cyclical challenges andstructural change.We make real products and essential services that meettwo genuine consumer needs: the need to understandwhat’s happening in this fast-moving and interconnected world and the need to be educated (andre-educated) to make the most of its opportunities.

10Pearson plc Annual report and accounts 2008Our strategy continuedMarjorie Scardino, chief executiveBut this year, more than ever, we can’t afford to becomplacent or think that things will continue to go ourway. We’ve planned that the tough market conditionswe saw in the closing months of 2008 will last for all of2009. And we’re continuing to prepare for the possibilitythat our customers and our markets may very well feelworse before they begin to feel better.Here are the few principles that are guiding ourdecisions this year:1. We’ve tried to act pre-emptively to get ourselves in astrong position to wea

Because that 12% decline in Pearson’s share price compares with much sharper falls elsewhere in a terrible year for equity markets: the FTSE 100 ended the year 31% lower, the FTSE Media Sector was 34% lower and t