64 BAE Systems | Annual Report 2016 Chairman’s governance letter Contents Dear Shareholders, During the course of the year, the Financial We welcomed the FRC’s report and the Chairman’s governance letter 64 Reporting Council (FRC) published its report principles of stakeholder engagement, Governance highlights 65 on Corporate Culture and the Role of Boards. directors’ duties and the importance of Board governance 66 The report contained key observations corporate integrity and responsible behaviour that it outlined. Board of directors 68 about the value of culture in driving the right behaviours in the boardroom and at Board information 70 Towards the end of 2016, there was another all levels in the company. We were pleased important governance publication, with the Governance disclosures 71 to see that the report included a case study UK government publishing a wide-ranging Audit Committee report 72 on BAE Systems, illustrating the work we had Green Paper on Corporate Governance undertaken over a number of years to foster Reform. Both documents quote in full the Corporate Responsibility high levels of personal trust between trade Committee report 76 basic duty of a company director as detailed unions and the Company’s senior leadership. in Section 172 of the Companies Act. Nominations Committee report 78 As part of this year’s Board evaluation, we Remuneration Committee report 79 have asked Board members to reflect on the In summary, the duty is to promote the questions asked in the FRC’s report concerning success of the company and, in doing so, corporate culture and provide their thoughts have regard to, amongst other matters, the on what they see within BAE Systems. In 2017, long-term consequences of any decisions, the we will be using the output from this to guide interests of employees and other stakeholders, the Board in its further consideration of this and the desirability of maintaining high important governance matter. standards of business conduct. As required by the Companies Act, this Annual Report informs shareholders how the directors have performed this duty. BAE Systems | Annual Report 2016 65 Strategic report Directors’ report Financial statements Governance highlights Board evaluation – – Charles Woodburn recruited during 2016 and the Board has announced development areas that he will succeed Ian King as Chief Executive with effect from 1 July 2017 – Succession planning – greater Board – Elizabeth Corley joined the Board as a non-executive director engagement in executive development and succession planning, including – A review of the Directors’ remuneration policy completed by the greater visibility of high-potential Remuneration Committee – following engagement and discussion with individuals. the Company’s principal shareholders. The new policy will be put to this – Board composition – continue the year’s Annual General Meeting (AGM) for approval non-executive succession planning activity with a view to recruiting an – Auditor re-tender initiated by the Audit Committee, which will result additional director. in new auditors being proposed for appointment at the 2018 AGM – Induction process – produce a new – A new programme of informal meetings created, enabling non-executive induction manual for newly-appointed directors and senior executives below the Board to meet and help directors. directors develop their knowledge of the Company’s management – Board meetings and papers – review the Board’s annual schedule of meetings in resources and business issues the interests of efficient use of time, – An externally-facilitated Board performance evaluation completed during travel and Board engagement. Continue to improve the balance of detail, overview the year and a number of actions agreed based on the findings and analysis provided in Board papers. The evaluation was undertaken by Independent Board Evaluation, who have no other connection with the Company. In particular, you will find on page 66 an In parallel with an independent appraisal of By adopting this approach, and regular outline of our governance structure, including Board performance, from time to time we engagement and involvement with all our how the Board sets the values, behavioural commission an independent survey of our stakeholders, the Board believes that it is expectations, policies and processes that shareholders’ views and perceptions of the best placed to align its policies and practices guide all that we do in BAE Systems – and performance of the Company. This document in keeping with the required governance also how the Board maintains oversight over is shared with all Board members as a standards of the day. performance and compliance with these supplement to the updates provided by The following report details how the Board delegated requirements. As our Chief senior executive Board members. In addition, has applied the UK Corporate Governance Executive tells all employees, “It’s not just as Chairman, I consult with our large Code principles in the conduct of our business about what we do, but how we do it.”. shareholders to ensure they have a full during the year. understanding of our strategy and I and Achieving high standards of corporate the Board have received direct feedback on governance is an intrinsic part of the Board’s their views on the Company, its performance agenda and, to that end, we completed a and governance. wide-ranging externally-facilitated evaluation of Board performance during the year. My contact is supplemented by independent meetings held by the Chairman of the The review reported very favourably on Remuneration Committee with specific Board member attitude, engagement and reference to our pay policy and reward contribution, and on the processes, practices structures. Of course, as required by the UK Sir Roger Carr Chairman and principles employed by the Company. Corporate Governance Code, shareholders A summary of the areas for development have access to the Senior Independent agreed by the Board is shown above. Director if there are concerns that cannot We have recently completed the internal be resolved through the normal Chairman performance evaluation for 2017, which or Chief Executive channels. will focus on the areas recommended for As a Board, we are committed to the highest improvement in 2016 and, as mentioned standards of behaviour, transparency and above, any actions necessary in response open discussion, together with diversity of to the FRC’s report on culture. opinion, experience, background and gender. 66 BAE Systems | Annual Report 2016 Board governance Shareholders Approximately 100,000 individual, corporate and employee shareholders who are invited to meet at least annually (in person or by proxy) and exercise their stewardship voting rights on the basis of one share/one vote. Annual General Meeting Shareholders vote on key governance matters, including the re-election of directors, their remuneration, the payment of dividends and the appointment of the auditors. Shareholder relations The Chief Executive and Group Finance Director meet the Company’s principal shareholders on a regular basis. Separately, the Chairman maintains regular contact with the Company’s principal shareholders on governance matters and ensures that all directors are aware of their views. Board Currently comprising 11 directors who meet regularly and make decisions on a collective basis. The directors have a legal duty to promote the success of the Company. The Board has adopted a governance structure based on the UK Corporate Governance Code (the Code). This is detailed in the Operational Framework (see opposite), which delegates matters to employees in a manner that has been designed to provide ongoing oversight of performance and adherence to policies and behavioural expectations. Board composition The Board consists of executive and independent non-executive directors, plus a non-executive chairman who was independent in accordance with the Code on his appointment. The non-executive directors constructively challenge and help develop proposals on strategy. They also scrutinise the performance of management in meeting agreed goals and objectives, and satisfy themselves as to the integrity of financial information, and that systems of risk management are robust and defensible. In addition, they set the remuneration of the executive directors and oversee board succession planning. Chairman Delegated Responsible for leading the Board and ensuring that it discharges its duties efficiently. authority Chief Executive Oversight of Responsible for the implementation and delivery of the strategy agreed by the Board. performance and compliance Senior Independent Director with the Acts as a sounding board for the Chairman and acts as an intermediary for the other directors as necessary. Operational Company Secretary Framework Responsible to the Board for ensuring that Board procedures are complied with. Through the Chairman, he is responsible for ensuring that directors are supplied with information in a timely manner. Delegation through committee Reporting, as appropriate, to terms of reference the Board on matters considered and agreed Board committees The membership of the principal board committees (see below) solely comprises non-executive directors. They provide leadership, scrutiny and oversight over key governance areas. P72 P76 P78 P79 Audit Committee Corporate Nominations Remuneration Responsibility Committee Committee Committee BAE Systems | Annual Report 2016 67 Strategic report Directors’ report Financial