Chairman’s Letter to Shareholders (Annual Report 2006 – 21 February 2007)
Good operational performance and effective implementation of a well-defined, soundly based strategy are combining to deliver real performance.
The focus of the Group’s strategy in recent years has seen a drive to improve returns and eliminate excessive risk in the UK-based operations, alongside the expansion of the Group’s presence in the US. This twin approach is transforming the Group’s performance in the UK market and has established BAE Systems as one of the major US defence companies.
Notable achievements in 2006 included the resolution of the approach to funding the deficit on the Group’s pension schemes, the completion of the sale of our 20% interest in Airbus and good progress towards securing further significant business in Saudi Arabia. Underlying these individual achievements has been a broad-based improvement in performance across the Group.
In addition to continuing to pursue the development of the Group in its two largest defence and aerospace markets, the UK and the US, the Group’s strategy recognises opportunities in the other home markets in which BAE Systems has a local presence and capability; Australia, Saudi Arabia, South Africa and Sweden.
Alongside the development of the Group in these six home markets, BAE Systems will continue to nurture a high performance culture. The delivery of continuous performance improvement remains key to the twin objectives of delivering cost-effective capability to our customers and maximising returns for our shareholders.
The Group’s strategy is reviewed regularly as part of the Group’s annual business planning process. This review tests the continued relevance of the current strategy. The adaptations made to the strategy are set out on page 11 of the Annual Report and reflect the progress made over the past 12 months.
With the transition of the Group from recovery to sustained performance growth, we have looked hard at the composition of the Board to ensure it continues to provide the most effective leadership of the Group’s development.
BAE Systems has a Board with a wealth of collective experience. That experience includes not just defence and aerospace domain knowledge but brings learning from other international contracting businesses and finance backgrounds. In addition to the three new non-executive directors appointed in 2005, we welcomed Sir Nigel Rudd to the Board on 10 September 2006. Michael Lester and Mark Ronald retired from the Board on 31 December 2006. Both have made major contributions to the Group and this industry, throughout long careers.
At the start of 2007 I was pleased to welcome to the Board Walt Havenstein, as Chief Operating Officer, with responsibility for our US-led operations, and Ian King, as Chief Operating Officer, with responsibility for the Rest of World, including UK, businesses.
In February we agreed retirement dates for Sue Birley and Ulrich Cartellieri. They have afforded the Group great service through their contribution to both the Board and its committees. The Group has benefited from their wise counsel and we thank them for this.
The Board now comprises approximately 60% non-executive directors.
The changes in the composition of the Board have enabled us to strengthen the Board committee s that provide oversight to executive remuneration, succession planning, audit and corporate responsibility.
BAE Systems has a highly skilled and dedicated workforce. Our people have demonstrated that they can rise to the challenge of delivering performance in a challenging technological industry and I am grateful to them for their contribution to the Group’s progress.
In December 2006, a decision was reached by the Serious Fraud Office to conclude its investigation related to the activities of the Group in Saudi Arabia. Our policies for conducting ethical business are clear and unambiguous, with established processes to ensure compliance.
The underlying UK company law provisions concerning narrative reporting have changed since our last annual report. The matters required to be reported as part of the new business review requirements are dealt with on pages 2 to 40 of the Annual Report and cover the Group’s activities during the year and likely future developments. Best practice in narrative reporting will continue to evolve and we will strive to remain at the forefront of developments in this area.
The Group’s corporate responsibility performance is summarised on pages 35 to 40 of the Annual Report and also detailed in an important separately published report. Like all high performance companies, our policies are kept constantly under review, and we are committed to take action wherever necessary to maintain the highest standard of corporate governance.
The Board is recommending an increased final dividend of 6.9p per share, making a total of 11.3p for the year. At this level, having taken account of the sale of Airbus, the annual dividend is covered 2.1 times by underlying earnings from continuing operations (2005 1.8 times). Subject to shareholder approval at the 2007 Annual General Meeting, the dividend will be paid on 1 June 2007 to holders of ordinary shares registered on 20 April 2007.
Dick Olver
Chairman
