Sound Economic Foundation

Cooper Industries – An Industry Leader
Economic health and stability is the bedrock of corporate sustainability. A solid financial base provides the foundation for all other aspects of sustainability. Cooper has such a foundation.

Business description and growth initiatives
Cooper is a leading global industrial company participating in two large markets: Electrical Products and Tools & Hardware. We supply a broad range of products with strong, recognizable brand names, and we offer services and solutions to customers in more than 50 countries around the world. We believe that Cooper’s breadth of products, services and solutions is unmatched by any comparable competitor. This allows us to mitigate the severities of economic downturns when they occur and the challenges created by consolidation and change within distribution channels. Cooper’s Board of Directors is responsible for monitoring and endorsing, as appropriate, the long-term strategy for growth of the Company. Since it was established in 1833, Cooper has strived to be a world-class manufacturer of quality products that serve several markets. Through the years we have had many initiatives for growth and sustainability. At the beginning of 2003, Cooper launched its Get Connected program, focusing on five key stakeholders – shareholders, customers, employees, suppliers and the communities where we do business. By leveraging the human capital, unique strengths and commercial leadership inherent in each of our businesses, we have increased the value of our corporate franchise for the benefit of each of these constituencies.

Cooper's principal operating objectives include growing sales, improving operating margins and generating excess cash. We are achieving these objectives. In addition, Cooper has several other key initiatives aimed at producing sustained long-term growth. These include increasing the global reach of our businesses, our Cooper Connection sales and marketing program, our Strategic Sourcing and Manufacturing Variance Improvement Program, and the implementation of an Enterprise Business System tying together all of our operations. All of these programs are contributing to Cooper's results.

Globalization has been an area of investment over the last several years. Cooper is building an impressive global footprint with manufacturing operations in more than 20 countries, sales and distribution activities in nearly 100 countries and more than 29,000 employees worldwide. Today, our international business is growing at twice the rate of our domestic business. A key contributor to this growth has been the addition of country managers in China, Mexico, Australia, Korea, Southeast Asia, Poland, Hungary and the Middle East. The dynamics that impact our business are increasingly complex, as is the world in which we operate. For example, a project today may be designed in Italy, built in Korea and delivered to the Middle East for a U.S. customer. Improving our ability to compete effectively on an international level is central to our long-term strategy of delivering faster growth.

Cooper Connection allows us to deliver unique benefits to our customers by joint-marketing the industry's strongest collection of businesses. The Company leverages its brand strength, customer relationships, market knowledge and product innovation to provide our customers with value-added solutions that drive their profitability and growth. The Cooper Connection allows us to attack the market with a product focus, as well as a geographic and vertical-market focus. We believe the Cooper Connection provides solutions that will enable Cooper Industries, our electrical distributors and end-user customers to win market share.

Strategic Sourcing was launched in 2000 on the premise that we can produce superior results by working together as a single company in order to secure needed materials at the lowest possible cost. Despite very difficult market conditions over the last several years, the Company has effectively controlled its material costs by consolidating buys across our businesses, sourcing from low-cost countries, using e-auctions and rationalizing our vendor base.

Manufacturing Variance Program (MVP) is the fourth initiative in our operating model. With more than 1,000 of our employees trained on Lean Manufacturing processes and Six Sigma statistical analysis, we are driving out waste and reducing cycle times in manufacturing, design and transactional processes. Cooper Industries is delivering productivity gains to mitigate escalating costs. MVP also allows us to perform more efficiently in key functional areas such as finance, human resources, sales and marketing, legal and mergers and acquisitions.

Finally, Cooper's Enterprise Business System (EBS) gives us the information to operate and grow our portfolio at world-class levels. Whether measuring service rates, factory productivity or customer profitability, the availability of timely, accurate and meaningful information is critical. EBS provides Cooper's management team the tools required for successful tactical and strategic decision-making, and execution.

Cooper has a comprehensive system of internal controls, a corporate compliance program and strong corporate governance principles, all of which foster the financial sustainability of the Company.

The Company’s system of internal control is designed to provide reasonable assurance that Company assets are safeguarded from loss or unauthorized use or disposition and that transactions are executed in accordance with management’s authorization and are properly recorded to permit the preparation of financial statements in accordance with generally accepted accounting principles. This system is augmented by a careful selection and training of qualified personnel, a proper division of responsibilities and the dissemination of written policies and procedures.

Our internal audit program monitors the effectiveness of this control system. The Audit Committee of the Board of Directors, which is comprised solely of independent directors, is responsible for overseeing Cooper’s financial reporting process. The Audit Committee meets periodically with management and Cooper’s internal auditors to review the work of each and to monitor the discharge by each of its responsibilities. The Audit Committee also hires independent auditors to help discharge its responsibilities and meets periodically with these independent auditors, who have free access to the Audit Committee and the Board of Directors to discuss the quality and acceptability of the Company’s financial reporting and internal controls. In addition, the Company, acting through the Audit Committee, has implemented a procedure providing for the confidential submission by employees and others to the Corporate Ethics Committee, with notice to the Audit Committee, of concerns regarding any questionable accounting or auditing matters.

Cooper’s commitment to transparency in the Company’s financial reporting is only one aspect of the Company’s 171–year tradition of operating in accordance with the highest ethical standards. Cooper strives in all its dealings with investors, customers, suppliers, employees and the communities in which the Company operates to be honest and fair and to comply with all applicable laws. These principles are embodied in the Company’s Code of Ethics and Business Conduct, which is supplemented by specific corporate policies and procedures that provide employees clear guidance on what constitutes proper behavior when acting on behalf of the Company. The Code is distributed to all Cooper employees and is available on Cooper’s Internet site. Certain employees, including all executive employees and employees in key functions such as purchasing, sales, engineering, human resources, finance and accounting, are required to certify periodically that they have not committed violations of the Code and have no conflicts of interest, as defined in the Code.

The Company’s compliance program is managed by the Corporate Ethics Committee, composed of three senior officers of the Company. The Committee interprets the Code, resolves compliance questions and potential conflicts of interest, develops policies and oversees the activities of Corporate Compliance Officers. These officers are appointed for specific compliance areas within the Company. They keep informed of changes in the law and educate employees within their respective areas. Training sessions were conducted for employees on ethics and legal topics such as antitrust law, environmental compliance, workplace safety, anti-bribery laws, product safety and others.

The Company maintains an Ethics Hotline so that employees or others who believe that a violation of the Code has been committed can report the suspected violation to the Corporate Ethics Committee. Employees or others also may report suspected violations in writing to the Company’s Senior Vice President, General Counsel and Chief Compliance Officer. All such reports are confidential. All reported suspected violations are investigated, and appropriate action, including disciplinary action, is taken by the Corporate Ethics Committee. At least annually, the Corporate Ethics Committee provides a written report of all compliance matters to the Audit Committee of the Board of Directors.