Chairman's introduction

At British American Tobacco, we remain committed to high standards of corporate governance. This is central to the continued strong performance of the business in a manner which is sustainable in the long term and to maintaining the confidence of investors. For us, good governance is about managing the business effectively and responsibly and in a way which is honest, transparent and shows accountability.

On the following pages, we set out our approach to governance at British American Tobacco. We explain how the Board and its Committees are structured, how they operate and what they have done in the year, as well as how their effectiveness is evaluated. There are benefits, we believe, to being transparent. We are therefore broadly supportive of the Government’s efforts to encourage more effective narrative reporting and we said as much in our response to its recent consultation in this area. We try to ensure that our reporting on governance matters is clear, concise and well-structured, that it is relevant and accessible to users, and that it facilitates the comparative analysis of the information provided. We seek to minimise ‘boiler plate’ by preparing a separate report against the UK Corporate Governance Code (the Code), which we publish on our www.bat.com website, although it is of course still important to ensure that this corporate governance statement meets the requirements of the Code. The quality of our narrative reporting was recognised in 2011, with the Company being awarded first place in the People Reporting and Executive Remuneration Reporting categories for the FTSE 100 in the PricewaterhouseCoopers Building Public Trust Awards. Thony Ruys, the Chairman of our Remuneration Committee, discusses our approach to executive remuneration, another topic which has been the subject of much recent debate, in his introduction to the remuneration report.

As a Board, we have ultimate responsibility for the Group’s performance and for overseeing the management of risk. We are keenly aware that the shareholders also look to us to promote the long-term success of the Company and I recognise that, as Chairman, it is my role to provide the leadership to enable it to do so effectively. This year’s evaluation of the Board, which for the second year running was facilitated externally, confirmed that the Board continues to meet these obligations. One aspect of the evaluation which we considered in detail this year was a review of the skills required by the Board and I am delighted to welcome Ann Godbehere to the Board following her appointment in October. Our search for further non-executive appointments continues.

The Board takes seriously its responsibility for promoting the Group’s values and, in particular, for ensuring that everyone within the Group is aware of their responsibility not only to act lawfully, but also to conduct themselves at all times with high standards of business integrity. These values are embodied in our Standards of Business Conduct, which were updated in September 2011 to ensure that they continue to reflect best business practice and that they are aligned with the provisions of the UK Bribery Act, which came into effect in July 2011. Corruption causes distortion in markets and harms economic, social and political development. We have long made it clear that it is wholly unacceptable for our companies and employees to be involved or implicated in any way in corrupt practices, and we continue to keep our anti-corruption policies and practices under review to ensure that they fully reflect this approach.

A further area of focus for us in 2011 was a review of our arrangements for ensuring the continued independence and objectivity of our external auditors. We consider that our relationship with PricewaterhouseCoopers is satisfactory but it is nevertheless important to guard against complacency. With support from its Audit Committee, the Board continues to satisfy itself as to both their effectiveness and their independence. Following the publication of revised guidance by the Financial Reporting Council, we have taken the opportunity to review and update our policy on auditor independence and we explain the revised policy in more detail in the section on audit and accountability.

One of the highlights of 2011 was the reclassification of the shares comprising our secondary listing on the JSE Limited in South Africa as domestic assets, allowing South African institutions to hold a greater number of shares in the Company. This very positive outcome followed a programme of engagement with the relevant authorities and our institutional investors in South Africa.

As I hope this report demonstrates, good corporate governance continues to be a key focus for the Board and this, combined with our clear and consistent strategy, means that the Company is well equipped to continue returning value to its shareholders. As we head towards our Annual General Meeting in April, I look forward to meeting with a number of you, both in the run up to the meeting and at the meeting itself, which this year will be held at a new venue, The Banqueting House in Whitehall, London.

Richard Burrows

Chairman