Corporate governance

This section of the report deals with how the Board and its committees discharge their duties and how we apply the principles in the UK’s Combined Code on Corporate Governance. In the Corporate governance section you will find detailed statements concerning our compliance with the provisions of the Code. However, first I would like to highlight certain corporate governance matters and developments during the year.

At the end of last year the Financial Reporting Council issued the results of its review of the Combined Code. It reported that investors perceived that there had been a continued improvement in overall governance standards of UK companies since the introduction of the Code. I am pleased that the efforts made by companies such as ours in seeking to continually improve and stay at the forefront of corporate governance best practice are recognised.

Standards and values

As the Combined Code states, boards should set the values and standards for a company. To provide the BAE Systems Board with the best possible guidance on governance in this area, earlier this year we appointed an independent committee headed by a former Lord Chief Justice of England and Wales, Lord Woolf. In forming the committee to study and publicly report upon its policies and processes, the Company seeks to:

“garner and implement recommendations which enable the Company to maintain a leadership position in ethical business practice amongst comparable industry peers; and
further enhance the publicly available level of assurance regarding the accuracy of its assertions as to its policy, processes and conduct.”

The Woolf Committee is to publish its report in due course and the Board has agreed to act on its recommendations.

I see the formation of the Woolf Committee as positive affirmation of the Board seeking to continually improve, and in the area of business ethics not only achieve best practice but provide leadership.

Succession planning

Ensuring that we have the right people running the Company is one of the Board’s core governance duties. Last year I reported on the new processes introduced by the Nominations Committee to identify and oversee the development of over 50 employees from across the Group. These individuals form the backbone of the Company’s senior management resource and in the future candidates for appointment to the Board are likely to be drawn from amongst them. Overseeing the management of their development is a key responsibility for the Board and the Nominations Committee.

A review of management resources was completed in November last year and I am pleased to report that we have a good number of quality succession candidates across the current senior management roles in the Group. These individuals cover the range from ‘ready now’ to those candidates who we believe have the potential to take up the most senior positions in several years’ time. In some areas we have identified a need in the succession plans for greater ‘bench strength’. Where this is the case we are working at achieving full coverage. In addition, we have augmented our strategic management development activities to address certain common development requirements identified by our development and succession planning processes.

Naturally, the Chief Executive position is covered by these processes and with Mike Turner due to retire later this year the Nominations Committee has been actively engaged since last November on who should succeed him. As mentioned above, the Company has comprehensive succession planning and management evaluation processes and these have been of great assistance. In line with best practice, the Nominations Committee has also initiated an external search for suitable candidates for the Chief Executive position, with the aim of ensuring that the individual that the Board ultimately chooses to appoint is the best person available for the job. Progress is being made and we hope to be in a position to announce a successor later this year.

Board appointments

During the year Andy Inglis joined the Board in a non-executive capacity. As a director of BP p.l.c. he has excellent large global company experience as well as having considerable international project execution experience.

We have agreed that as a Board, in addition to the chairman, we should aim to have eight non-executive and four executive directors. With Ulrich Cartellieri having retired last September and Peter Weinberg due to retire from the Board at the Annual General Meeting (AGM) in May, the Nominations Committee has been active and I am pleased that Ravi Uppal will be joining the Board as a non-executive director in April. Search activity continues with a view to appointing an additional non-executive director later this year.

We need not only the right mix of knowledge, skills and experience around the Board table but also we have to be in a position to resource effectively the Board’s committees. This is an important consideration because, as with the Audit and Remuneration committees, we believe the membership of the Corporate Responsibility Committee should be formed exclusively of independent non-executive directors.

Board committees

The role that board committees play in the UK’s corporate governance structure should not be underestimated. As we seek to continually improve the effectiveness of our governance processes the demands on the committees have increased. The table on the Corporate Governance page detailing the attendance of directors at board committee meetings during the year shows that a total of 26 meetings were held last year; this compares with 17 meetings five years ago – over a half more.

A unitary board containing a good number of both executive and non-executive directors is an excellent forum within which to develop and challenge strategy and provide entrepreneurial leadership for a company. However, certain responsibilities can only be undertaken effectively by directors who are independent of the activities they are required to oversee. The Audit and Remuneration committees are obvious examples of this, but this applies equally to the Corporate Responsibility Committee. You will find a report from this committee on the Corporate Responsibility Committee report page, but I would like to highlight in particular the role it has in overseeing compliance with the highest standards of ethical behaviour by all Group employees and also in overseeing our performance in keeping our employees safe and healthy in the workplace. With Peter Weinberg retiring from the Board, Andy Inglis has been appointed to succeed him as chairman of the Corporate Responsibility Committee, having first been nominated for appointment to this position by the Nominations Committee.

Board performance evaluation

I mentioned earlier the recent report on the Combined Code by the Financial Reporting Council. Reporting on its consultative exercise, it had the following to say on the subject of board performance evaluation:

“A number of respondents singled out the Code’s recommendation that boards should carry out regular evaluations of their performance as having been particularly beneficial. This view was endorsed by the chairmen of the FTSE 350 companies surveyed by Independent Audit, of whom over 90% had found the exercise to be useful.”

I am a big believer in performance evaluation, as this is a fundamental part of performance improvement. As a Board we have just completed our fourth such performance evaluation. This exercise covered the performance of the Board, its committees and that of the individual directors.

The Board evaluation includes a review of the Board’s effectiveness, the effectiveness of each Board Committee, and an assessment of each Board director. One-on-one feedback discussions between the Chairman and each director occur in the first quarter of the year. The table below details some of the objectives that the Board has agreed as a result of the evaluation process.

When we started the evaluation process in 2004 I was keen to use an external facilitator to conduct individual interviews with each director. No evaluation process is perfect but I believe our approach does allow us to deal effectively with not only the procedural or administrative aspects of how we operate but also some of the behavioural aspects of performance. As Chairman, it is important I receive full and frank feedback on my own performance and I receive this each year from our Senior Independent Director after he has met with the facilitator.

Shareholder communication.

Finally, I would like to highlight the importance I place on communications with our shareholders and the central role the AGM plays in this. I want attendance at our AGM to be an interesting and worthwhile experience, allowing directors to report on their stewardship of the Company and to answer shareholders’ questions on this. I hope as many shareholders as possible are able to attend and participate in the meeting on 7 May.

Dick Olver Chairman