The Board is collectively responsible to the Company’s shareholders for the long-term success of the Group and for its overall strategic direction, its values and its governance. It provides the leadership necessary for the Group to meet its business objectives within the framework of its internal controls, while also discharging the Company’s obligations to its shareholders.
Key activities of the Board in 2010
The Board kept under review the Group’s performance throughout 2010, focusing in particular on industry trends, the outlook in strategically important markets and key consumer segments and the performance of the Group’s Global Drive Brands. In doing so, it considered the global economic climate, as well as the impact on the Group’s volumes of industry volume declines, growing illicit trade and foreign exchange movements, as well as specific incidents such as the floods in Pakistan. It satisfied itself throughout the year that, despite difficult trading conditions, management remained on track to deliver the strategy.
The Board regularly considered opportunities for growth through strategic acquisitions and reviewed the impact of the acquisition of the Bentoel tobacco business and its merger with BAT Indonesia effective 1 January 2010. It also considered the innovations pipeline as a driver of future growth.
It kept under review the Group’s liquidity and the means by which it funds its activities and continued to satisfy itself that management was making sufficient provision in this regard.
The Board continued to oversee initiatives aimed at managing costs, increasing efficiencies and leveraging the Group’s global reach. It considered a number of short-term initiatives and reviewed progress on the longer-term Global Integration Project, aimed at achieving structural savings. A number of proposed reorganisations within the Group’s regions and functions were considered during the year and are now in the process of being implemented, including a reorganisation of the Group’s regions and the closure of the Group’s factory in Lecce, Italy. In addition, the closure of the Group’s factory in Denmark was completed.
The Board monitored developments in tobacco regulation around the world, including regulation being considered by the US Food and Drug Administration, the consultation on the European Tobacco Product Directive, and the likely content of the Product Guidelines being developed under the FCTC. It also kept under review the activities being undertaken within the Group’s Research & Development function aimed at developing potentially reduced-harm products. It was briefed on the results of clinical trials undertaken by the Group in 2010. It also received an update on proposals to conduct extended clinical trials on further prototype products in 2011 and noted that the Group would be publishing several papers covering the results of its clinical trial studies in peer reviewed journals. The cooperation agreement entered into with the European Commission and member states of the European Union in July 2010, aimed at collectively tackling the problem of illicit trade in tobacco, was presented to the Board, and it also received an update on the FCTC Protocol on Illicit Trade.
The Board reviewed succession planning in consultation with the Nominations Committee and considered and agreed the Committee’s various recommendations for appointments at both Main Board and Management Board level, including those arising from the Chief Executive’s forthcoming retirement. In addition, the position of the Group’s major pension funds was reviewed including how the Group is managing future liabilities, and the results of the global ‘Your Voice’ survey of employees conducted in 2010 were considered.
The Board held one of its meetings in Russia, one of the Group’s key markets, where it received presentations from members of the Eastern Europe regional team and the British American Tobacco Russia top team in Moscow and visited the factory in St Petersburg.
Evaluation of Board performance
Update on 2009 objectives
Specific actions arising out of the 2009 Board evaluation included:
- additional non-executive appointments;
- a review of the sequencing, timing and resourcing of the Audit and CSR Committees so that meetings of both committees could be held simultaneously;
- a review and overall assessment of Group risk to be carried out by the Board at least once a year; and
- a review of the distribution of board papers and the introduction of a board software solution.
Progress has been made on most of these objectives with some
overflow into 2011. A new
Non-Executive Director, Kieran Poynter, was appointed with effect from 1 July 2010 and the Board is actively seeking one or more further non-executive appointments. Mr Poynter’s membership of the CSR Committee, together with the provision of additional Audit and Secretarial resources to service the Committee, have enabled meetings of the CSR Committee and the Audit Committee to be held simultaneously with effect from July 2010. This has removed a significant time pressure which existed previously for both meetings and has allowed greater flexibility to schedule appropriate training and briefing sessions on CSR and Audit matters into those Committee agendas. The Board Programme was revised to provide for an annual overview of the Group’s Risk Register by the Board, again starting in July 2010. Identifying a suitable software solution for the distribution of papers has been deferred pending an assessment in 2011 of suppliers offering appropriate technology solutions.
Outcome of 2010 evaluation
The overall assessment for 2010 showed that the Board is strong and performs well. Across all seven categories the Board rated itself highly. In particular, the assessment noted the Board’s focus on strategy, risk, succession, financial oversight, good governance and ethical behaviour. It is considered to be a constructive sounding board with a good spread of skills, backgrounds, gender and nationalities appropriate for a multinational business, and is considered to work well as a unit with the key relationships being sound. A number of areas for improvement were nevertheless identified in the report and have been discussed by the Board. The key actions agreed for 2011 are set out below.
- Build on the success of the revised Audit and CSR Committee arrangements by carrying out a review of the size and composition of the Remuneration Committee.
- In the interests of full transparency, ensure that the Remuneration Committee receives a formal report following the Chief Executiv's annual appraisal of each member of the Management Board.
- Each of the four Committees to review the specific comments relating to their activities set out in the Evaluation Report and report back to the Board with any additional agreed action points.
- Review the current process for confirming whether Directors will be put forward for re-election, particularly in view of the requirement in the 2010 Code to submit all directors for annual re-election.
- Establish a direct reporting line for the Company Secretary to the Chairman in relation to Board matters.
- With regard to succession and, specifically the appointment of Non-Executive Directors to the Board, the Nomination Committee was reminded of the need to have particular regard to a person's ability to influence outcomes.
In addition to these key areas, a number of more administrative actions were also agreed such as a review of the calendar of standard Board items to ensure continuing relevance, periodic reviews of the content of reports to the Board, and a review of the induction arrangements to ensure all areas of the business remain covered. In addition, the remaining 2009 action point regarding a Board software solution will also be implemented.
A number of actions have already been completed, for example a direct reporting line to the Chairman has been established for the Company Secretary in relation to Board matters and the Chairman has discussed re-election with each Director as part of their development plan discussions. Other action points will be monitored through the year by way of regular reports to the Board and will be reported in next year's Annual Report.
As at the date of this Annual Report, the Company has a Board of 13 Directors:
- Richard Burrows
- Paul Adams (Chief Executive)
- Nicandro Durante (Chief Executive Designate)
- Ben Stevens (Finance Director and Chief Information Officer)
- John Daly (Chief Operating Officer)
- Sir Nicholas Scheele (Senior Independent Director)
- Karen de Segundo
- Robert Lerwill
- Dr Ana Maria Llopis
- Christine Morin-Postel
- Dr Gerry Murphy
- Kieran Poynter
- Anthony Ruys
Paul Adams will retire from the Board and as Chief Executive on 28 February 2011. Having been appointed Chief Executive Designate on 1 September 2010, Nicandro Durante, formerly Chief Operating Officer, will succeed him as Chief Executive on 1 March 2011. John Daly was appointed as an Executive Director and Chief Operating Officer on 1 September 2010 and, on the same date, Ben Stevens took on the additional role of Chief Information Officer. Kieran Poynter was appointed to the Board as a Non-Executive Director with effect from 1 July 2010. Ana Maria Llopis will be retiring from the Board following the conclusion of the Company’s Annual General Meeting on 28 April 2011.
Biographical and related information about the Directors is given on the Board of Directors page.
Balance of Non-Executive Directors and Executive Directors
Length of tenure of Non-Executive Directors
Gender split of Directors
Chairman and Chief Executive
The Chairman and Chief Executive are responsible for the profitable operation of the Group. Their roles are separate, with each having distinct and clearly defined responsibilities.
The Chairman is responsible for leadership of the Board and for ensuring its effectiveness on all aspects of its role. He sets the agenda for Board meetings in consultation with the Chief Executive and the Company Secretary. He is also responsible for ensuring that the interests of the Company’s shareholders are safeguarded and that there is effective communication with them. The Chairman is accountable to the Board for leading the direction of the Group’s corporate and financial strategy and for the overall supervision of the policies governing the conduct of the Group’s business.
The Chief Executive has overall responsibility for the performance of the Group’s business. He provides leadership to the Group to enable the successful planning and execution of the objectives and strategies agreed by the Board. He is also responsible for stewardship of the Group’s assets and, jointly with the Chairman, for representation of the Group externally.
The role of the Non-Executive Directors is to help develop strategy and, where appropriate, to provide constructive challenge to management’s proposals. They are responsible for scrutinising the performance of management in meeting agreed goals and objectives and for monitoring the reporting of performance. All of the Non-Executive Directors remain available to meet with major investors in order to understand their views and concerns.
Senior Independent Director
Sir Nicholas Scheele is the Senior Independent Director. When required, he presides at meetings of the Board and shareholders in the absence of the Chairman. He serves as intermediary for the other Directors where necessary and is available should occasion arise where there is a need to convey concerns to the Board other than through the Chairman, the Chief Executive and the other Executive Directors.
All Directors are aware of their responsibility to take decisions objectively which promote the success of the Company for the benefit of its shareholders.
The Board considers that all of the Non-Executive Directors are independent, in the sense that they are free from any business or other relationships which could materially interfere with or appear to affect the exercise of their judgment and have not previously been involved in the management of the Group.
Kieran Poynter retired as Chairman and Senior Partner of PricewaterhouseCoopers LLP, the Company’s auditors, on 30 June 2008, two years prior to his appointment to the Board. The Board specifically considered, prior to his appointment, whether his previous position with PricewaterhouseCoopers might impact upon his independence in light of Code Provision A.3.1 (B.1.1 in the 2010 Code), which identifies, as one of the circumstances which are likely, or could appear, to affect a director’s judgment, any material business relationship with the Company within the previous three years. The Board took into account that Mr Poynter had neither worked with the Group nor had any responsibility for the British American Tobacco account as audit partner or otherwise during his time with the firm. Given the size and scale of PricewaterhouseCoopers as a global professional services firm, and the fact that it works with a great many businesses, the Board concluded that, in the absence of direct involvement in the Company’s business, his association with the firm up to June 2008 was no impediment to its assessment of him as independent in June 2010. Mindful, however, that this could be an area of concern for shareholders, the Board decided to appoint him to the Nominations and Corporate Social Responsibility Committees only at this time. He is not currently a member of either the Audit Committee or the Remuneration Committee.
Meetings of the Board
The Board held nine meetings in 2010, seven of which were scheduled and two of which were convened to address Main Board and Management Board succession issues as a result of Paul Adams’s retirement with effect from 28 February 2011. The Board is scheduled to hold seven meetings in 2011.
Board meeting attendance
|Sir Nicholas Scheele||8||9|
|Karen de Segundo||8||9|
|Dr Ana Maria Llopis||9||9|
|Dr Gerry Murphy||9||9|
The Chairman will always seek to obtain consensus at Board meetings but, where necessary, decisions will be taken by majority. If any Director has concerns about the running of the Company or a proposed action which cannot be resolved, such concerns will be recorded in the Board minutes. No such concerns arose in 2010.
The Non-Executive Directors, led by the Chairman, meet, if required, prior to meetings of the Board without the Executive Directors present and also meet annually, led by the Senior Independent Director, without the Chairman present.
The Board’s principal responsibilities include:
- Approving the Group’s business strategy and ensuring that an effective management team and the necessary financial and human resources are in place for the Group to meet its objectives.
- Agreeing the Group Budget.
- Approving the Company’s Annual Report and reviewing its periodic financial reports.
- Declaring an interim dividend and recommending the final dividend.
- Agreeing the agenda for the Annual General Meeting.
- Agreeing Board succession plans and considering the evaluation of the Board’s performance over the preceding year.
- Reviewing the Company’s risk management and internal controls systems and governance framework and approving the Standards of Business Conduct and other Group policies.
The Management Board has responsibility for overseeing the implementation by the Group’s operating subsidiaries of the policies and strategy set by the Main Board, and for creating the conditions for their successful day-to-day operation. The Management Board is chaired by the Chief Executive and its other members are the Chief Executive Designate, the Finance Director, the Chief Operating Officer and the 10 senior Group executives, whose names appear on the Management Board page. It held nine scheduled meetings in 2010 and no unscheduled meetings. It is scheduled to hold nine meetings in 2011. Members of the Management Board are invited to attend meetings of the Board from time to time, in particular when the Group’s strategy and Budget are under discussion.
The Board has established four principal Board Committees, to which it has delegated certain of its responsibilities. They are the Audit Committee, the Corporate Social Responsibility (CSR) Committee, the Nominations Committee and the Remuneration Committee. The roles, membership and activities of these Committees are described in more detail later in this Corporate governance statement and, in the case of the Remuneration Committee, in the Remuneration report. Each Committee has its own terms of reference, which have been reviewed and updated to ensure that they remain consistent with best practice and that they are aligned with the 2010 Code. The updated terms of reference were considered and adopted by the Board in December 2010 and came into effect on 1 January 2011. They are available from the Company Secretary and on www.bat.com
Conflicts of interest
The Board has formal procedures for managing compliance with the conflicts of interest provisions of the Companies Act 2006. The Company’s Articles of Association permit the Board to authorise situational conflicts. Directors are required to give advance notice of any conflict issues to the Company Secretary, and these are considered either at the next Board meeting or, if the timing requires it, at a meeting of the Board’s Conflicts Committee. The full Board is notified at its next meeting of any matters authorised by the Committee. In February each year, the Board reviews all previously authorised situational conflicts, considering each one afresh. Directors are excluded from the quorum and the vote in respect of any matters in which they have an interest.
During 2010, a number of situational and transactional conflicts were notified to the Company in accordance with these procedures. All matters authorised by the Board and the Conflicts Committee were recorded in the register of interests maintained by the Company Secretary. None were sufficiently significant to warrant disclosure, but included, for example, Robert Lerwill’s appointment as Non-Executive Director and Audit Committee Chair of Transcom Worldwide S.A. and Kieran Poynter’s appointment as Non-Executive Director of International Consolidated Airlines Group S.A.
Information and professional development
All Directors receive induction on joining the Board, covering their duties and responsibilities as directors. Non-Executive Directors also receive a full programme of briefings on all areas of the Company’s business from the Executive Directors, members of the Management Board and other senior executives, and they may request such further information as they consider necessary.
All Directors receive briefings designed to update their skills and knowledge on a regular basis, for example in relation to the business and on legal and regulatory requirements, and by visits to Company sites (see Key activities of the Board in 2010). They also make use of the opportunity to attend meetings of the Group’s regional audit and CSR committees. The Board timetable has been extended with effect from 2011 to allow an additional day for training or briefings on relevant matters.
Following his appointment, Kieran Poynter attended induction briefings covering the Group’s strategy, its organisational structure and its business functions and activities, including its financing principles and statutory reporting cycle, environmental health & safety issues, research & development activities and legal and regulation issues. He also attended sessions addressing corporate governance and directors’ duties, the Group’s internal control and risk management framework and the role of the external auditors and its information technology strategy. John Daly also received a briefing on directors’ duties on his appointment to the Board.
The full Board received briefings on a number of legal and regulatory developments, including the 2010 Code, the Bribery Act 2010, current trends in corporate governance and the potential impact of a change to the tax treatment of pension accruals scheduled to be introduced in April 2011.
In addition, in keeping with his enhanced responsibilities under the 2010 Code, the Chairman met separately with each Non- Executive Director in October 2010 in order to discuss individual development plans. As a result of these discussions:
- a briefing session on the Group’s Research & Development activities and its operations in Southampton has been organised for June 2011;
- further briefings will be scheduled to review the Group’s investment in its associate companies;
- the Group’s long-term strategy is to be reviewed with the Chairman and Chief Executive during 2011; and
- a review of the progress of a project to provide enhanced IT delivery has been scheduled for the first half of 2011.
The Board and its Committees receive high-quality, up-to-date information for review in good time ahead of each meeting, and the Company Secretary, under the direction of the Chairman, ensures good information flows within the Board and its Committees and between the Non-Executive Directors and senior management. She is also responsible for advising the Board, through the Chairman, on all governance matters. The appointment and removal of the Company Secretary is a matter for the Board.
All Directors have access to the advice and services of the Company Secretary, and a procedure is in place for them to take independent professional advice at the Company’s expense should this be required. The Company has arranged appropriate insurance to provide cover in the event of legal action against its Directors.
Evaluation of Board performance
The Company’s approach to Board evaluation was reconsidered this year following a Board discussion of the 2010 Code and its implications for the Company’s corporate governance policies and processes. Although the Company is satisfied that its previously internally conducted evaluations had been robust and thorough, it is keen to be at the forefront of good corporate governance practice. Accordingly, and consistent with its aim to meet the requirements of the 2010 Code early, the Company decided to conduct its first externally facilitated board performance evaluation during 2010.
A shortlist of possible external facilitators was prepared in July 2010. To avoid any possible conflicts of interest, no board search agencies or headhunters were included. Detailed proposals were requested from each of the candidates and a number were then interviewed by the Chairman and Company Secretary. On the basis of their proposed approach and extensive experience, Simon Osborne and Geoffrey Shepheard from the Institute of Chartered Secretaries and Administrators, were appointed to conduct a full evaluation of the performance of the Board including an overview of the work of the Committees and the performance of individual Directors.
Key areas for the review were agreed with the Chairman at the outset. These included topics for discussion proposed by the facilitators as well as those areas for improvement which had been identified in the previous year’s, internally facilitated, review. Overall, seven categories were identified:
- the role of the Board, its responsibilities and those of its Committees;
- oversight, covering how the Board oversees risk, business ethics and corporate governance and the arrangements for reviewing the performance of Directors and senior managers;
- the arrangements for and effectiveness of Board meetings;
- the support and training for the Board;
- Board composition, including the range of skills required, succession planning and effectiveness of the Chairman, Senior Independent Director and Committee Chairmen;
- how the Board works together and its engagement with shareholders; and
- outcomes and achievements including how the Board is perceived externally.
Simon Osborne interviewed each of the Directors and the Chairman using a pre-defined question plan covering the agreed areas. At the end of each series of questions on a particular topic, each Director was asked to make an assessment ranging from poor through to excellent. Specific justification was requested if anyone rated a particular topic area as excellent and the interviewer also used his own experience to question and challenge the ratings given. Each interview was written up on a pro forma report and confirmed by the Director as an accurate record of the interview. The findings from the interviews formed the basis for a detailed report and presentation to the Board and a number of recommendations were made by the facilitators and discussed at the Board meeting.
While the Board discussed the effectiveness of each of the Committees in general terms, each Committee requested an opportunity to consider the findings of the Board evaluation in detail. Separate reports will be prepared for each Committee using material from the original interviews in respect of their activities. These will be considered during 2011 and any additional action points may be agreed by each Committee separately.
Comment on the personal performance of each of the Directors was provided directly to the Chairman, who then met separately with the Directors to discuss the findings of the Board evaluation, their individual performance and their personal development plan for the year ahead.
The Chairman received feedback from the Senior Independent Director, who had previously met with the other Directors to discuss the Chairman’s performance using a separate discussion guide. This covered general issues relating to the effectiveness of his leadership of the Board as well as a specific issue raised by a shareholder during the year.
In addition to the formal Board Evaluation process the Chairman also discusses the effectiveness and performance of Directors immediately before they make themselves available for re-election.