Corporate governance
Corporate governance
Applying the principles of the Combined Code on Corporate Governance
The Board has structured its activities so as to incorporate the main and supporting principles in the UK’s Combined Code, recognising these to be a sound statement of accepted good practice for a company such as BAE Systems. The core activities of the Board and its committees are documented and planned on an annual basis but this only forms the basic structure within which the Board operates. The directors are required to provide entrepreneurial leadership for the Company, relying on the business skills and judgement that each director possesses. The governance structure recognises this essential human element and the role of the Chairman in ensuring that decisions are made by the directors within a framework of prudent and effective controls.
The Board has adopted a document, the Board Charter, in which there is a statement of governance principles that guide the activities of the Board and also details of the roles of the Chairman, Chief Executive and the Senior Independent Director. The governance principles reflect the main and supporting principles contained in the Combined Code and cover the following:
- Strategy – reviewing and agreeing strategy;
- Performance – monitoring the performance of the Group and also evaluating its own performance;
- Standards and Values – setting standards and values to guide the affairs of the Group;
- Oversight – ensuring an effective system of internal controls is in place, ensuring that the Board receives timely and accurate information on the performance of the Group and the proper delegation of authority; and
- People – ensuring the Group is managed by individuals with the necessary skills and experience and that appointments to the Board are managed effectively.
The Board Charter states that the Chief Executive is responsible for the leadership and operational management of the Company within the strategy and business plan agreed by the Board. Included within the Charter is a schedule of matters that have been reserved for the Board’s decision. These include approving the vision, values, principles of ethical conduct, overall governance structure of the Company and its strategy and business plans. Within the Board’s delegated authorities it has reserved for itself, amongst other things, certain decisions concerning contract bids and tenders, acquisitions and disposals of businesses, capital expenditure and Company-funded product development expenditure.
A copy of the Board Charter can be found on the Company’s website, or alternatively, can be obtained from the Company Secretary.
Compliance with the provisions of the Combined Code
Compliance statement
The Company was compliant with the provisions of the Combined Code on Corporate Governance throughout 2007.
The Board
The Board comprises a non-executive chairman, seven non-executive directors and four executive directors.
The Board considers all of the non-executive directors, with the exception of the Chairman, to be independent for the purposes of the Combined Code. Each of these directors have been identified on the Board of directors page.
Peter Weinberg was appointed to the Board in 2005. As Mr Weinberg was a senior director of Goldman Sachs Inc. (an investment bank that provides services to BAE Systems) the Board addressed the issue of his independence prior to his appointment in light of provision A.3.1 of the Combined Code concerning the possible existence of a ‘material business relationship’ between the director and the Company or between the Company and a party with which the director is a major shareholder, senior employee, partner or director. It determined that he was independent for the purposes of the Combined Code, notwithstanding the relationship with Goldman Sachs. The reasons for reaching this conclusion were:
- Goldman Sachs is a very large organisation with many clients. BAE Systems is therefore just one of many clients it has worldwide and the fees earned from its relationship with the Company represent a very small part of its total revenues. As a consequence, the Board believes that the relationship between the Company and Goldman Sachs does not represent ‘a material business relationship’; and
- prior to his appointment to the Board, Mr Weinberg had no involvement with BAE Systems and none of the executive directors or the Chairman had had any business dealings with him.
Mr Weinberg ceased to be associated with Goldman Sachs in 2006.
In 2007 the Board was scheduled to meet eight times and in addition one day was spent reviewing strategy. Additional Board meetings are called as required and in total the Board met 12 times during the year.
The Board has appointed Sir Peter Mason as the Senior Independent Director. Amongst the duties undertaken by Sir Peter during the year was to meet with the non-executive directors without the Chairman present to appraise the Chairman’s performance.
The attendance by individual directors at meetings of the Board and its committees in 2007 was as follows:
| Director | Board | Audit Committee |
Corporate Responsibility Committee |
Nominations Committee |
Remuneration Committee |
Non-Executive Directors’ Fees Committee |
|---|---|---|---|---|---|---|
| Professor S Birley1 | 3 (5) | – | 1 (1) | – | 3 (3) | – |
| Mr P Carroll | 11 (12) | – | 5 (5) | 7 (8) | – | – |
| Dr U Cartellieri2 | 8 (9) | 3 (3) | – | – | – | – |
| Mr C V Geoghegan | 10 (12) | – | – | – | – | – |
| Mr M J Hartnall | 12 (12) | 4 (4) | – | – | – | – |
| Mr W Havenstein | 11 (12) | – | – | – | – | 1 (1) |
| Mr A G Inglis3 | 6 (6) | – | 2 (2) | – | – | – |
| Mr I G King | 11 (12) | – | – | – | – | – |
| Sir Peter Mason | 10 (12) | 3 (4) | – | 7 (8) | – | – |
| Mr S L Mogford1 | 3 (5) | – | – | – | – | – |
| Mr R L Olver | 12 (12) | – | – | 8 (8) | – | 1 (1) |
| Mr R Quarta | 9 (12) | 1 (1)4 | – | – | 8 (8) | – |
| Mr G W Rose | 12 (12) | – | – | – | – | – |
| Sir Nigel Rudd | 11 (12) | – | 5 (5) | – | 8 (8) | – |
| Mr M J Turner | 12 (12) | – | – | – | – | 1 (1) |
| Mr P A Weinberg | 10 (12) | – | 5 (5) | – | 7 (8) | – |
Figures in brackets denote the maximum number of meetings that could have been attended.
1 retired from the Board on 9 May 2007
2 retired from the Board on 26 September 2007
3 appointed to the Board on 13 June 2007
4 in attendance at three additional meetings when not a member of the Committee
The Company’s Articles of Association require that all new directors seek re-election to the Board at the following AGM. In addition, all directors are required to stand down and seek re-election to the Board at least once every three years.
The Board has set out in the Notice of Annual General Meeting their reasons for supporting the re-election of those directors seeking re-election at the forthcoming AGM.
Internal control
The Board has conducted a review of the effectiveness of the Group’s system of internal controls, including financial, operational and compliance controls and risk management systems, in accordance with the Combined Code and the Turnbull guidance (as revised).
BAE Systems has developed a system of internal control that was in place throughout 2007 and to the date of this report, that encompasses, amongst other things, the policies, processes, tasks and behaviours that taken together, seek to:
- facilitate the effective and efficient operation of the Company by enabling it to respond appropriately to significant operational, financial, compliance and other risks that it faces in carrying out its business;
- assist in ensuring that internal and external reporting is accurate and timely and based on the maintenance of proper records supported by robust information gathering processes; and
- assist in ensuring that the Company complies with applicable laws and regulations at all times and also internal policies in respect of the standards of behaviour and conduct mandated by the Board.
Reporting within the Company is structured so that key issues are escalated through the management team ultimately to the Board if appropriate. The Operational Framework provides a common framework across the Company for operational and financial controls and is reviewed on a regular basis by the Board. The business policies and processes detailed within the Operational Framework draw on global best practice and their application is mandated across the organisation. Lifecycle Management (LCM) is such a process and promotes the application of best practice programme execution and facilitates continuous improvement across the Group. It considers the whole life of projects from inception to delivery into service and eventual disposal, and its application is critical to our capability in delivering projects to schedule and cost.
Further key processes are Integrated Business Planning (IBP), Quarterly Business Reviews (QBR) and Performance Centred Leadership (PCL). The IBP, approved annually by the Board, results in an agreed long-term strategy for each business group, together with detailed near-term budgets. The QBRs, chaired by the Chief Operating Officers, evaluate progress against the IBP and business performance against objectives, measures and milestones. PCL drives business success by linking individual goals to those of the organisation enabling employees to understand how their own success contributes to the success of the whole business.
Whilst the quality of the control processes is fundamental to the overall control environment, the consistent application of these processes is equally important. The consistent application of world-class control processes is a key management objective.
The Company is committed to the protection of its assets, which include human, property and financial resources, through an effective risk management process, underpinned where appropriate by insurance.
The Internal Audit team independently reviews the risk identification procedures and control processes implemented by management. It provides objective assurance as to the operation and validity of the systems of internal control through a programme of cyclical reviews making recommendations for business and control improvements as required.
The Board has delegated to the Audit Committee responsibility for reviewing in detail the effectiveness of the Company’s system of internal controls. Having undertaken such reviews, the Committee reports to the Board on its findings so that the Board as a whole can take a view on this matter. In order to assist the Audit Committee and the Board in this review, the Company has developed the Operational Assurance Statement (OAS) process. This has been subject to regular review over a number of years, which has resulted in a number of refinements being made.
The OAS requires that each part of the business completes a formal review of its compliance against the Operational Framework, including operational and financial controls and risk management processes. It is signed-off by the managing director of every line of business and relevant functional directors. The OAS is completed every six months and includes a formal assessment of business risk.
The overall responsibility for the system of internal control within BAE Systems rests with the directors of the Company. Responsibility for establishing and operating detailed control procedures lies with the line leaders of each operating business.
In line with any system of internal control, the policies and processes that are mandated in the Operational Framework are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.
The responsibility for internal control procedures with joint ventures and other collaborations rests, on the whole, with the senior management of those operations. The Company monitors its investments and exerts influence through Board representation.
Going concern
After making due enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
Relations with shareholders
The Company has a well-developed investor relations programme managed by the Chief Executive, Group Finance Director and Investor Relations Director. In addition, the Chairman is in regular contact with major shareholders and looks to keep them informed of progress on corporate governance matters. In order to assist in developing an understanding of the views of major shareholders, each year the Company commissions a survey of investors undertaken by external consultants. The results of the survey are presented to the Board.
The Company maintains a comprehensive Investor Relations website that provides, amongst other things, information on investing in BAE Systems and copies of the presentation materials used for key shareholders presentations. This can be accessed via the Company’s website, www.baesystems.com.
The AGM provides all shareholders with the opportunity to develop their understanding of the Company and ask questions on the matters put to the meeting including this Annual Report. All shareholders are entitled to vote on the resolutions put to the AGM and, to ensure that all votes are counted, the Company’s Articles of Association requires that a poll is taken on all the resolutions in the Notice of Meeting. The results of the votes on the resolutions will be published on the Company’s website.
