 Nominations Committee
Statement of Directors’ Responsibilities
Remuneration Committee
Audit Committee
Nominations Committee
Appointments to the Board – the Nominations Committee
The Board has formed a Nominations Committee (the Committee) that has been charged with nominating suitable candidates for the Board to consider appointing as directors of the company. The terms of reference of the Committee were agreed during 2003 and conform with best practice for such committees as recommended by Derek Higgs in his report on corporate governance published in 2003.
The Committee considers the mix of skills and experiences that the Board requires and seeks the appointment of directors to meet its assessment of what is required to ensure that the Board is effective in discharging its responsibilities. The Committee appoints external consultants to assist it in identifying candidates for nomination to the Board. Spencer Stuart was appointed to provide such services during 2003.
During 2003 the Committee considered the time that it believed a non-executive director would normally be required to commit to his or her duties including serving on the Board’s committees. Details of these time commitments have been included in individual non-executive directors’ letters of appointment.
During 2003, the Nominations Committee initiated the search for a successor to the present chairman, Sir Richard Evans. The search involved a detailed process of identifying the skills and experience that the ideal candidate for this position requires as well as the amount of time that the individual will need to devote to the role. The company’s major shareholders were consulted as part of this. The search was successfully conclucded with the appointment of Dick Olver.
Board balance and independence
At present the Board comprises 14 directors, half of whom are non-executive. During 2003, the Board considered that all of the non-executive directors were independent under the provisions of the existing Code.
The Nominations Committee and the Board have reviewed the provisions in the revised Code and have concluded that since the beginning of 2004, under the definitions used, five of the current non-executive directors are independent and one, Lord Hesketh, is not. This is because he and Mr Turner are both directors of Babcock International Group and he has been on the Board for more than ten years with effect from the beginning of 2004. As a result, at least half of the Board does not comprise independent non-executive directors as proposed in the revised Code. The Nominations Committee and the Board are aware of this and will be taking it into consideration in their plans for the future composition of the Board.
The Board has appointed Sir Peter Mason as its senior independent director.
Professional development
The chairman has asked the chief executive to ensure that the training and development needs of the executive directors are understood and addressed. Also, he has asked the company secretary to work with the non-executive directors to provide the resources and assistance required to keep their skills and knowledge current. In addition, the non-executive directors are regularly provided with opportunities to develop their understanding of the company by visiting its facilities and meeting employees.
When a director first joins the Board, the company secretary is responsible for ensuring that an induction programme is provided to meet the needs of the new director. Typically, this process will cover the duties of a director, familiarisation with the company’s core processes and system of internal control as well as gaining an understanding of the various businesses by meeting senior managers throughout the company. New directors also meet major shareholders if this is requested.
The company secretary, through the chairman, is responsible for advising the Board on governance matters.
Performance evaluation
The Board has considered the requirement in the revised Code to evaluate its own performance and that of its committees and individual directors. The best means of effectively undertaking this are being evaluated with a view to this process being completed during 2004. The performance of the chairman has been evaluated by the non-executive directors led by the senior independent director, Sir Peter Mason.
Re-election
The company’s Articles of Association require that all new directors seek re-election to the Board at the next Annual General Meeting (AGM) after appointment. In addition, all directors are required to stand down and seek re-election to the Board at least once every three years.
View the terms of reference of the Nominations Committee.
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Statement of Directors’ Responsibilities
Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company and the group and of the profit or loss for that period. In preparing those financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
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Remuneration Committee
Remuneration
The remuneration of executive directors is determined by the Remuneration Committee (the Committee) which comprises solely non-executive directors. In determining remuneration policy the Committee seeks to provide appropriate levels of remuneration for senior executives and balance the interests of shareholders by:
- positioning basic salaries at median competitive levels whilst seeking to reward potential upper quartile performance with upper quartile remuneration;
- aligning corporate and individual performance criteria for incentive-based remuneration with the interests of shareholders; and
- maintaining a personal shareholding policy of up to 200% of base salary.
No director is involved in deciding his own remuneration. The chairman of the Committee consults the chairman of the Board and/or the chief executive, as appropriate, about proposals relating to the remuneration of other executive directors. The fees of the non-executive directors are determined by the Board but the non-executive directors themselves do not participate in board discussions or vote on matters concerning their fees. The company maintains contact with its principal shareholders in respect of changes to remuneration policy.
The Committee appoints remuneration consultants when reviewing remuneration policy or, where appropriate, requests the company to appoint them on its behalf. The Group Human Resources Director (who is not a Board member), as primary internal adviser to the Committee, takes care to recognise and avoid any potential conflict of interests when advising the Committee; the same applies when the chairman and chief executive are consulted by the Committee on matters concerning the other executive directors. Recognising this potential conflict of interest, the Committee requires that proposals for changes to remuneration policy are underpinned by the provision of externally validated data.
View the terms of reference of the Remuneration Committee.
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Audit Committee
Audit Committee report
The Board’s Audit Committee (the Committee) is chaired by Michael Hartnall who was until 2003 the finance director of a major UK-listed company. In addition to Mr Hartnall there are a further two members of the Committee. The Committee normally asks the company’s chief executive, finance director and internal audit director to attend its meetings together with the external auditors. During the year the Committee has met on occasions with no executive directors present and has also met with only the internal audit director or the external auditors present.
The Committee meets four times a year and has a detailed annual programme of work to cover in those mettings.
In 2003, the Committee considered the report produced by Sir Robert Smith on audit committees and, whilst the Committee was largely compliant, a number of actions were taken to ensure that the Committee was fully compliant with this most recent statement on best practice. The recommendations in the Smith Report have been adopted by the Financial Reporting Council and are now included as part of the revised Code.
The Committee’s terms of reference were revised during 2003 and now incorporate fully the provisions contained in the revised Code.
Since the beginning of 2003 the Committee has, amongst other things, undertaken the following in order to discharge its responsibilities:
- reviewed the financial statements in the 2002 and 2003 annual reports and the interim report issued in September 2003. As part of this review the Committee received reports from the external auditors on their audits of the annual reports and review of the interim report;
- reviewed the effectiveness of the company’s internal controls and disclosures made in the annual reports on this matter;
- reviewed and agreed the scope of the audit work to be undertaken by the external auditors;
- agreed guidelines for employment of former employees of the company’s external auditors;
- considered a report from the external auditors on their review of financial controls across the group and received a report on management action taken in response to the management letter issued by the external auditors following the 2002 audit;
- agreed the fees paid to the external auditors for their audit of the 2003 accounts;
- evaluated the performance of the external auditors;
- evaluated the performance of the internal audit function;
- agreed a programme of work for the company’s internal audit function;
- received a report from the internal audit director on the work undertaken by internal audit and management responses to recommendations made in the audit reports issued by the function during the year;
- reviewed its own effectiveness; and
- monitored the work being undertaken by the group in preparation for the introduction of International Accounting Standards.
The company has established an employee hotline to provide a means by which employees can raise any concerns they may have about unethical business conduct. To help ensure that employees have confidence in this arrangement the hotline is provided by a third party who passes details of calls or e-mails received to the internal audit director.
The Committee receives a report on individual contacts made to the hotline which includes a summary of the nature of the issue raised and details of any action taken.
The Committee has formally reviewed whether there are any factors that may prejudice the independence of the external auditors (the auditors). As part of this review the Committee recognised that, in addition to the statutory work undertaken by the company’s auditors, there will be certain work of a non-audit nature that is best undertaken by the auditors. It believes that, provided suitable controls are in place, undertaking this work does not compromise the auditors. The following specific actions have been taken by the Committee to safeguard the auditors’ independence:
- rules have been issued controlling the nature and quantity of non-audit work that may be undertaken by the auditors;
- guidelines have been adopted restricting the employment within the group of individuals formerly employed by the auditors;
- the auditors are required to confirm in writing to the Committee each year that they believe that they remain independent within the meaning of the regulations on this matter and their professional standards; and
- the independence of the auditors is considered each year by the Committee as part of its formal review of their appointment.
As reported to shareholders last year, the Committee has adopted a programme of undertaking a major review of the company’s auditors every three years and in the years in between undertaking a review to monitor their performance. The next major review will be in respect of the appointment of auditors for the year ending 31 December 2006. A review of the performance of the company’s auditors was undertaken recently by the Committee. On the basis of this review the Committee recommended to the Board that they support the re-appointment of KPMG Audit Plc as the company’s auditors. The Board has agreed with this recommendation and consequently a resolution to this effect was put to shareholders at the company’s AGM and duly passed.
View the terms of reference of the Audit Committee.
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Nominations Committee - Terms of Reference
(Approved by the Board on 29 April 2003)
References to “the Committee” shall mean the Nominations Committee.
References to “the Board” shall mean the Board of Directors of BAE SYSTEMS plc.
1. Membership
| 1.1 |
The Committee shall have at least three members, one of whom shall be the Chairman of the Board and such other directors as shall be appointed by the Board.
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| 1.2 |
With the exception of the Chairman of the Board all other members of the Committee shall be non-executive directors of the Company a majority of whom shall be independent of management and free from any business or other relationship that could interfere with the exercise of their independent judgement.
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| 1.3 |
The Board shall appoint the Committee Chairman.
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2. Secretary
| 2.1 |
The Company Secretary shall act as the Secretary to the Committee.
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3. Quorum
| 3.1 |
The quorum necessary for the transaction of business shall be two. A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee.
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4. Meetings
| 4.1 |
The Committee shall agree each year the dates on which meetings are to be held that year and may meet at such other times as the Chairman of the Committee may determine.
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| 4.2 |
Meetings of the Committee shall be summoned by the Secretary of the Committee at the request of any member thereof.
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| 4.3 |
The Chief Executive shall attend meetings of the Committee as required.
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5. Minutes of Meetings
| 5.1 |
The Secretary shall minute the proceedings and resolutions of all Committee meetings, including the names of those present and in attendance.
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| 5.2 |
Minutes of Committee meetings shall be circulated to all members of the Board.
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6. Annual General Meeting
| 6.1 |
The Chairman of the Committee shall attend the Annual General Meeting and be prepared to respond to any shareholder questions on the Committee’s activities.
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7. Duties
The Committee shall:
| 7.1 |
Review regularly the structure, size and composition of the Board and make recommendation to the Board with regards to any changes that it believes are necessary or desirable.
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| 7.2 |
Prepare a description of the role and capabilities required for particular Board appointments having regard to the balance of skills, knowledge and experience of the Board.
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| 7.3 |
Identify and nominate for the approval of the Board suitable candidates to fill vacancies for non-executive positions on the Board as and when they arise.
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| 7.4 |
With the assistance of the Chief Executive and Chairman, identify suitable candidates to fill vacancies for executive positions on the Board and to nominate them for the Board’s approval.
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| 7.5 |
Plan for the orderly succession of new directors to the Board.
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| 7.6 |
Recommend to the Board the membership and chairmanship of the Audit and Remuneration committees.
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8. Authority
| 8.1 |
In connection with its duties and at the Company’s expense, the Committee is authorised by the Board to obtain legal and other professional advice as required.
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Remuneration Committee - Terms of Reference
(Approved by the Board on 29 April 2003)
References to “the Committee” shall mean the Remuneration Committee.
References to “the Board” shall mean the Board of Directors of BAE SYSTEMS plc.
1. Membership
| 1.1 |
The Committee shall have at least three members, each of whom shall be appointed by the Board.
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| 1.2 |
All members of the Committee shall be non-executive directors of the Company who are independent of management and free from any business or other relationship that could interfere with the exercise of their independent judgement.
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| 1.3 |
The Board shall appoint the Committee Chairman.
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2. Secretary
| 2.1 |
The Company Secretary shall act as the Secretary to the Committee.
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3. Quorum
| 3.1 |
The quorum necessary for the transaction of business shall be two. A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee.
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4. Meetings
| 4.1 |
The Committee shall meet on not less than five occasions during the year on dates to be agreed at the start of the year and at such other times as the Chairman of the Committee may determine.
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| 4.2 |
Meetings of the Committee shall be summoned by the Secretary of the Committee at the request of any member thereof.
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| 4.3 |
The Chairman of the Board, Chief Executive and Group HR Director shall attend meetings of the Committee as required but should not normally be in attendance when their own remuneration is under discussion.
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5. Minutes of Meetings
| 5.1 |
The Secretary shall minute the proceedings and resolutions of all Committee meetings, including the names of those present and in attendance.
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| 5.2 |
Minutes of Committee meetings shall be circulated to all members of the Board.
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6. Annual General Meeting
| 6.1 |
The Chairman of the Committee shall attend the Annual General Meeting and be prepared to respond to any shareholder questions on the Committee’s activities.
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7. Duties
The Committee shall:
| 7.1 |
Determine and agree with the Board the framework or broad policy for the Remuneration of the Chairman, executive directors of the Company and such other members of the executive management whose remuneration it is asked to consider. The remuneration of non-executive directors shall be a matter for the Chairman and executive members of the Board. No director or manager shall be involved in any decisions as to his or her own remuneration.
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| 7.2 |
Within the terms of the agreed policy, determine the individual remuneration package of the Chairman and each executive director including, where appropriate, bonuses, incentive payments, share based incentive schemes and post retirement benefits.
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| 7.3 |
Determine policy on the terms and conditions to be included in the service agreements for the executive directors, including termination payments and compensation commitments.
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| 7.4 |
Liase with the Nominations Committee to ensure that the remuneration of newly appointed executive directors will be within the overall policy agreed by the Committee.
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| 7.5 |
Approve the creation of employee share based incentive schemes and to grant options under the rules of any such schemes and to agree and approve any performance criteria attaching thereto.
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| 7.6 |
Approve any outside directorships for executive directors.
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| 7.7 |
Determine targets for any bonus or performance related share schemes operated by the Company.
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| 7.8 |
In accordance with legal and regulatory requirements, produce a report on the directors’ remuneration for inclusion in the Company’s annual report and accounts.
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8. Authority
| 8.1 |
The Committee is authorised by the Board to seek any information it requires from any employee of the Company in order to perform its duties.
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| 8.2 |
In connection with its duties and at the Company’s expense, the Committee is exclusively responsible for appointing and agreeing terms of reference for remuneration consultants and advisers.
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Audit Committee – Terms of Reference
(Approved by the Board on 10th September 2003)
References to “the Committee” shall mean the Audit Committee.
References to “the Board” shall mean the Board of Directors of BAE SYSTEMS plc.
1. Membership
| 1.1 |
The Committee shall be appointed by the Board on the recommendation of the Nominations Committee, and shall comprise a Chairman and at least two other members.
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| 1.2 |
All members of the Committee shall be independent non-executive directors. At least one member of the Committee shall have recent and relevant financial experience.
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| 1.3 |
The Committee may ask any executive Director of the Company and any senior manager of the Company to attend meetings of the Committee either regularly or by invitation. Such invitees shall have no right of attendance.
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| 1.4 |
Non-executive directors who are not members of the Committee may attend Committee meetings unless agreed otherwise by the Committee.
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| 1.5 |
The Committee shall ask a representative of the Company’s Auditors and the head of the Company’s internal audit function to attend Committee meetings. Each year the Committee shall have one meeting or part of a meeting with the Auditors without any executive Directors or members of management present.
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2. Secretary
| 2.1 |
The Company Secretary shall act as Secretary to the Committee.
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3. Quorum
| 3.1 |
The quorum necessary for the transaction of business shall be two. A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee.
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4. Frequency of Meetings
| 4.1 |
The Committee shall usually meet four times each year but shall not meet on fewer than three times each year.
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| 4.2 |
The Chairman shall call a meeting of the Committee at the request of the Auditors or the head of the Company’s internal audit function.
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5. Annual General Meeting
| 5.1 |
The Chairman of the Committee shall attend the Annual General Meeting and be available to respond to any shareholder questions on the Committee’s responsibilities and activities.
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6. Duties
| 6.1 |
Internal Control and Risk Assessment
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| 6.1.1 |
The Committee shall keep under review the effectiveness of the Company’s financial reporting and internal control policies and procedures for the identification, assessment and reporting of risk.
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| 6.2 |
Internal Audit |
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| 6.2.1 |
The Committee shall monitor the role and effectiveness of the Company’s internal audit function and management response to its findings and recommendations.
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| 6.2.2 |
The Committee shall consider and approve the terms of reference of the internal audit function, its resourcing and whether it has access to information to enable it to fulfil its mandate. It shall also be advised of the planned programme of audits and progress against that programme.
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| 6.2.3 | Members of the Committee shall receive a summary of all reports produced by the internal audit function and have access to all such reports in full.
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| 6.2.4 | Approve the appointment or removal of the head of the Company’s internal audit function
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| 6.2.5 | The head of the Company’s internal audit function shall have direct access to the Chairman of the Committee.
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| 6.3 |
Auditors |
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| 6.3.1 |
The Committee shall consider and make recommendations to the Board as regards to the appointment and re-appointment of the Company’s Auditors, and shall ensure that the senior partner responsible for Auditors’ team is changed from time to time.
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| 6.3.2 |
The Committee shall keep under review the relationship with the Auditors including (but not limited to):
- approving the terms of their engagement;
- agreeing the scope of their annual audit;
- the independence and objectivity of the Auditors;
- their qualifications, expertise and resources;
- approving fees payable to the Auditors in respect of audit work they undertake, and
- the extent and nature of any non-audit work that the Auditors may undertake for the Company.
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| 6.3.3 |
The Committee shall review with the Auditors their proposed audit programme and the results of their audit of the Company’s financial statements.
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| 6.3.4 |
The Committee shall review the audit representation letters before signature by management.
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| 6.3.5 |
The Committee shall review the management letter (or equivalent) and review and monitor management’s responsiveness to the Auditor’s findings and recommendations.
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| 6.3.6 |
At the end of the annual audit cycle, the Committee shall assess the effectiveness of the audit process:
- reviewing whether the Auditors have met the agreed audit plan;
- considering the robustness and perceptiveness of the Auditor; and
- obtaining feedback from key individuals about the conduct of the audit.
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| 6.4 |
Financial Statements |
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| 6.4.1 |
The Committee shall monitor the integrity of the Company’s financial statements.
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| 6.4.2 |
The Committee shall review the significant financial reporting issues and judgements made in relation to the preparation of the Company’s annual and interim financial statements. Such matters shall include (but not be limited to) accounting standards, accounting policies, the going concern assumption, the clarity of disclosures, adjustments resulting from the audit and conformity with legal and regulatory requirements.
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| 6.4.3 |
The Committee shall review the proposed statement on internal control systems prior to endorsement by the Board. It shall also review the policies and processes for identifying and assessing business risk and the management of those risks.
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| 6.5 |
Reporting Responsibilities |
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| 6.5.1 |
The Committee Chairman shall report to the Board on the proceedings of the Committee on a regular basis.
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| 6.5.2 |
The Company’s annual report and accounts shall include a separate section describing to shareholders the role of the Committee and its responsibilities and how it has discharged these responsibilities during the year.
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| 6.5.3 |
The Company Secretary shall circulate the minutes of the Committee’s meetings to all Directors.
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| 6.6 |
Other Matters |
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| 6.6.1 |
The Committee shall review what arrangements are in place by which employees of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters.
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| 6.6.2 |
The Committee shall review on a regular basis its own performance and terms of reference to ensure that it is operating effectively.
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7. Authority
| 7.1 |
The Committee is authorised to seek any information it requires from any employee of the Company in order to perform its duties.
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| 7.2 |
The Committee may, at the Company’s expense, obtain independent professional advice on any matters covered by these terms of reference.
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