British American Tobacco is committed to maintaining high standards of corporate governance. Our corporate governance framework is directed towards achieving our business objectives in a manner which is responsible and in accordance with high standards of honesty, transparency and accountability. These principles are reflected in our Standards of Business Conduct, which have been in place for many years and are kept under continual review in order to ensure that they remain at the forefront of best business practice. Every Group company and every employee worldwide is expected to live up to them. In addition, the principles set out within our Statement of Business Principles are designed to help meet the expectations placed on us by our various stakeholders. Both documents are available from the Company Secretary and through our bat.com website.

The principal governance rules applying to UK companies listed on the London Stock Exchange are contained in the Combined Code on Corporate Governance adopted by the Financial Reporting Council in July 2003 (the Code). An updated version of the Code was published in June 2006 and applies to reporting years beginning on or after 1 November 2006. While in preparing this Statement we have taken account of the updated Code, our formal obligation for 2006 is to report by reference to the July 2003 version of the Code. Accordingly, references in this Statement to the Code are, unless otherwise stated, to that version of the Code.

As required by the Code, this Statement reports on how the Code’s principles are applied by the Company and provides our formal report on compliance with the Code’s provisions.

The Board

The Board is responsible to the Company’s shareholders for the success of the Group and for its overall strategic direction, its values and its governance. It provides the leadership necessary to enable the Group’s business objectives to be met within the framework of the internal controls described below, while also ensuring that the Company’s obligations to its shareholders and others are met.

Directors

The Company currently has a Board of 12 Directors: the Chairman, three Executive Directors – the Chief Executive, the Chief Operating Officer and the Finance Director – and eight Non-Executive Directors. They are listed in the Directors’ Report and their details appear in the Annual Review in Board of Directors.

Anthony Ruys was appointed as a Non-Executive Director on 1 March 2006. His appointment was confirmed at the Company’s Annual General Meeting on 27 April 2006.

Meetings of the Board

The Board held seven scheduled meetings in 2006 and is scheduled to hold the same number of meetings in 2007.

Among the key matters on which the Board alone may make decisions are the Group’s business strategy, its annual budget, dividends and major corporate activities. It is also responsible for reviewing the Company’s internal controls and governance system and for approving our Standards of Business Conduct. In addition, the Board annually:

• approves the Annual Report and Accounts, recommends the final dividend and agrees the agenda for the Annual General Meeting;
• reviews the quarterly and interim results and declares an interim dividend;
• agrees succession plans and evaluates the Board’s performance over the preceding year; and
• agrees the two year Company budget.

The agenda for Board meetings is set by the Chairman in consultation with the Deputy Chairman, the Chief Executive and the Company Secretary. In addition to the Company Secretary, the General Counsel to the Company ordinarily attends all meetings of the Board.

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 Deputy Chairman, without the Chairman present.

All Directors are aware of their responsibility to take decisions objectively in the interests of the Company. The Chairman will always seek to obtain consensus at Board meetings but, in exceptional circumstances, 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 2006.

Management Board

The Board delegates to the Management Board responsibility for overseeing the implementation by the Group’s operating subsidiaries of the policies and strategy which it sets, 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 Finance Director, the Chief Operating Officer and nine senior Group executives, whose names appear in the Annual Review in The management board. It held nine scheduled meetings in 2006 and is scheduled to hold the same number of meetings in 2007. Members of the Management Board are also invited to attend meetings of the Board from time to time, in particular when the Group’s future strategy and annual budgets are under discussion.

Board Committees

The Board has established four principal Board Committees, to which it has delegated certain of its responsibilities. They are the Audit Committee, the Nominations Committee, the Remuneration Committee and the Corporate Social Responsibility Committee. Each has its own clear terms of reference, which are available from the Company Secretary and through our bat.com website. The roles and membership of these Committees are described in more detail where appropriate below.

Scheduled Board and Committee meetings held in 2006

The following table shows the number of scheduled Board and Committee meetings held in 2006 and the number attended by their respective members.

– Indicates not a member of that Committee. 

Notes:

1. Anthony Ruys was appointed to the Board and to its four Committees with effect from 1 March 2006.
2. Every Director withdrew from any meeting at which his or her own position was being considered.
3. All Directors attended the Annual General Meeting in April 2006 with the exception of Anthony Ruys, who was unable to attend due to a conflicting engagement which had been arranged prior to his appointment to the Board.

Chairman and Chief Executive

The roles of Chairman and Chief Executive are separate, with each having distinct and clearly defined responsibilities.

The Chairman is responsible for leadership of the Board, ensuring its effectiveness and setting its agenda, and for ensuring that a clear business and financial strategy for the Group is formulated for recommendation to the Board. An important aspect of this function is to ensure effective communication with the Company’s shareholders, and facilitate the productive contribution of the Non-Executive Directors in particular.

Once agreed by the Board as a whole, it is the Chief Executive’s responsibility to ensure delivery of the strategic and financial objectives. He is also responsible for stewardship of the Group’s assets and, jointly with the Chairman, representation of the Group externally.

Board balance and independence

The Board considers that six of the eight Non-Executive Directors are independent. Thys Visser and Piet Beyers are presumed not to be independent because of the shareholdings that they represent. Accordingly, they do not sit on the Audit or Remuneration Committees, both of which comprise solely independent Non-Executive Directors.

Rupert Pennant-Rea has served on the Board for just under nine years but, including his tenure on the Board of B.A.T Industries p.l.c., he has served on the Board of the Group’s ultimate holding company for slightly in excess of 11 years. It had originally been envisaged that he would retire in 2006. However, in order to provide ongoing continuity and stability in 2006 following a two year period in which there had been a number of changes in the Board’s membership, it was agreed that he would remain a Non-Executive Director during the year. The extension of his tenure was approved at the Annual General Meeting in April 2006. The Board recognises that length of service can impact on the independence of a Non-Executive Director and has therefore kept his position under careful review. It is satisfied, in light of his continuing valuable contributions to the Board and its Committees, that he has remained independent throughout the period under review. Rupert Pennant-Rea will retire from the Board at the conclusion of the Company’s Annual General Meeting on 26 April 2007.

The Non-Executive Deputy Chairman, Kenneth Clarke, is the Senior Independent Director. He is available should occasion arise where there is a need to convey concerns to the Main Board other than through the Chairman or Chief Executive. He and the other Non-Executive Directors remain available to meet with major investors in order to understand their views and concerns.

Appointments to the Board

The Board has established the Nominations Committee to make recommendations on suitable candidates for appointment to the Board and for promotion to the Management Board, ensuring that both Boards have the appropriate balance of expertise and ability. It is chaired by Jan du Plessis and its remaining membership comprises all of the Non-Executive Directors.

The Nominations Committee is responsible for ensuring that the procedure for appointing new Directors is rigorous and transparent and that appointments are made on merit and against objective criteria for the purpose. The selection process will generally involve benchmarking and interviews with a selection of candidates, using the services of executive search firms specialising in board level recruitment. This process was followed in connection with the appointment of Anthony Ruys to the Board.

Directors are submitted for reappointment at regular intervals by application of the Company’s Articles of Association. These require that at each Annual General Meeting: (1) not less than one-third of the Directors who are subject to retirement by rotation must retire, and (2) any Director has to retire who was not appointed at either of the two previous Annual General Meetings and who has served as a Director for more than two years since appointment or last reappointment.

Non-Executive Directors are appointed for a specified term, being an initial period to the next Annual General Meeting after appointment and, subject to reappointment at that meeting, for a further period ending with the Annual General Meeting no more than three years thereafter. Subsequent appointment will be subject to endorsement by the Board and the approval of shareholders. There is a general assumption on the part of the Board that Non-Executive Directors will not normally be invited to stand for reappointment after serving nine years. The Committee reviews forthcoming retirements at least once a year and considers the need to identify candidates to fill vacancies for non-executive positions on the Board. This process includes an evaluation of the skills and experience to be looked for in those candidates to ensure continuing Board balance. In light of Rupert Pennant-Rea’s forthcoming retirement, the process is in hand.

The Nominations Committee has made recommendations to the Board as to the Directors who are retiring and being put forward for reappointment at the Annual General Meeting on 26 April 2007.

Information and professional development

Directors receive induction on joining the Board, which consists of at least two days’ briefings on all areas of the Company’s business. After a period on the Board, they are given an opportunity to review the induction programme and raise questions on any areas in respect of which they would like further information. In addition, they have the opportunity to update their skills and knowledge on a regular basis, for example through further briefings on the business and by visits to Company sites. They also make use of the opportunity to attend meetings of the Group’s regional audit committees.

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 Board conducts a critical evaluation of its activities on an annual basis. The Company Secretary conducts private interviews with all Directors individually (both Executive and Non-Executive) to ascertain their views on the performance of the Board and its Committees and then compiles a report for the Deputy Chairman. The report is presented to the Non-Executive Directors and then to the entire Board. In addition, the Company Secretary collates the views of each Director on the individual performance of the other Directors and presents these to the Chairman, who then uses them in any discussions which he holds with any individual Director regarding his or her effectiveness. The Chairman also discusses the effectiveness and performance of Directors immediately before they make themselves available for reappointment. The Remuneration Committee evaluates the effectiveness of the Chairman and the Chief Executive annually and the Chairman’s performance is also appraised annually at a meeting of the Non-Executive Directors, led by the Senior Independent Director, without the Chairman present.

The process in 2006 confirmed that all Directors continue to make an effective contribution to the Board and that the Board and its Committees continue to operate effectively in discharging their obligations and meeting defined objectives. The Notice for this year’s Annual General Meeting confirms that the performance of the Directors being proposed for reappointment continues to be effective and that they continue to show commitment to their role.

The performance and commitment of any Non-Executive Director being proposed for appointment for a third term of three years should be subject to a particularly rigorous review. This was done in the case of Thys Visser, who will be proposed for reappointment at the Annual General Meeting on 26 April 2007.

Remuneration

It is the role of the Remuneration Committee to determine the framework and policy on terms of engagement (including remuneration) of the Chairman, Executive Directors and members of the Management Board, and the specific remuneration of each Executive Director and Management Board member (including entitlements under share incentive schemes and pension schemes) and any compensation payments. Fees payable to Non-Executive Directors are determined by the Board on the recommendation of the Chairman and Chief Executive.

The Remuneration Committee is chaired by Kenneth Clarke and its members are Robert Lerwill, Ana Maria Llopis, Rupert Pennant-Rea, Anthony Ruys and Sir Nicholas Scheele. Details of the Directors’ remuneration are set out in the Remuneration Report.

Accountability and audit

Financial reporting
The Board is satisfied that it has met its obligation to present a balanced and understandable assessment of the Company’s position and prospects in the Directors’ Report and Accounts, the Annual Review (including the Operating and Financial Review) and Summary Financial Statement, interim reports, reports to regulators and price-sensitive announcements. A summary of the Directors’ responsibilities for the financial statements and their statement concerning relevant audit information is included in the Directors’ Report. The Directors’ statement that it is appropriate to continue to adopt the going concern basis in preparing the accounts is set out in the Directors’ Report.

Audit Committee
The Board’s obligation to establish formal and transparent arrangements for considering how it should apply financial reporting and internal control principles, and for maintaining an appropriate relationship with the Company’s external auditors, PricewaterhouseCoopers LLP, is met through the Audit Committee.

The Audit Committee is chaired by Robert Lerwill and comprises five other independent Non-Executive Directors – Kenneth Clarke, Ana Maria Llopis, Rupert Pennant-Rea, Anthony Ruys and Sir Nicholas Scheele. Robert Lerwill has recent and relevant financial experience. The Chief Operating Officer, Finance Director, Head of Audit and Business Risk and a representative of the external auditors regularly attend meetings of the Committee. As a matter of best practice, the Committee meets alone with the external auditors at the end of its meetings.

The Committee is authorised by the Board to review any activity within the business. It is authorised to seek any information it requires from, and require the attendance at any of its meetings of, any Director or member of management, and all employees are expected to cooperate with any request made by the Committee. The Committee is authorised by the Board to obtain, at the Company’s expense, outside legal or other independent professional advice and secure the attendance of outsiders with relevant experience and expertise if it considers this necessary.

Activities of the Audit Committee in 2006
The Audit Committee met five times during 2006, including immediately before the Company’s full year results were published. It reviewed the Company’s Financial Statements, including the full and half year results.

During the course of the year, the Committee met regularly with management and with the internal and external auditors to review the effectiveness of internal controls and business risk management, and received reports from the Group’s regional audit committees. It reviewed compliance with the Standards of Business Conduct and the procedures in place within the Group for the management of its business records. It gave detailed consideration to business risks arising in the context of the Group’s treasury operations, its information technology systems and the threat to the Group’s business posed by illicit trade, and reviewed the specific controls in place within the Group to address such risks. It has satisfied itself by means of these steps that proper and satisfactory internal control systems remain in place to identify and contain business risks, and that the Company’s business, and that of its subsidiaries, is being conducted in a proper and economically sound manner.

The Audit Committee made recommendations to the Board on the reappointment, for approval by shareholders, of the Company’s external auditors and approved their fees and terms of engagement. It continued to keep under review the consistency of accounting policies applied across the Group. The Committee has established a policy on the appointment of the auditors to perform non-audit services for the Group over and above the external audit and keeps this issue under continual review. It remains confident that the objectivity and independence of the auditors are not in any way impaired by reason of this further work. Moreover, the Committee is satisfied that such work is best handled by them, either because of their knowledge of the Group or because they have been awarded it through a competitive tendering process. A breakdown of non-audit fees charged by the auditors is disclosed in note 3(d).

The Group’s whistleblowing policy and procedures enable staff, in confidence, to raise concerns about possible improprieties in financial and other matters and to do so without fear of reprisal, provided that such concerns are not raised in bad faith. Details of this policy are set out in the Company’s Standards of Business Conduct. The policy is supplemented by local procedures in a number of markets and in the Group’s London headquarters, which provide staff with additional guidance and enable them to report matters in a language with which they are comfortable. The Audit Committee remains satisfied that the policy and the procedures in place incorporate arrangements for the proportionate and independent investigation of matters raised and for appropriate follow-up action.

Internal control
The Board is responsible for the overall system of internal control for the Company and its subsidiaries and for reviewing the effectiveness of the system. It carries out such a review at least annually, covering all material controls including financial, operational and compliance controls and risk management systems, and reports to shareholders that it has done so.

The Company maintains a sound system of internal control with a view to safeguarding shareholders’ investment and the Company’s assets. It is designed to manage risks that may impede the achievement of the Company’s business objectives rather than to eliminate these risks and can therefore provide only reasonable, not absolute, assurance against material misstatement or loss. A description of the key risk factors that may affect the Group’s business is provided in the Operating and Financial Review of the Annual Review.

The Group uses audit committees at regional, area and end market levels to support the Audit Committee in monitoring risks and control. This framework provides a continuing process for identifying, evaluating and managing the significant risks faced by the Company and its subsidiaries. The framework is designed to capture and evaluate failings and weaknesses and, in the case of any categorised by the Board as significant, procedures are in place to ensure that appropriate remedial action is taken. It does not apply in respect of the Group’s associate undertakings. The process is regularly reviewed by the Board. The Group’s regional audit committees (which are all chaired by an Executive Director) focus on risks and the control environment within each region and are in turn supported by end market or area audit committees. The regional audit committees’ reviews include consideration of the effectiveness of the process for identifying, evaluating and managing the risks of the business and the assessments of internal control and business risks completed by operating companies. The relevant external and internal auditors regularly attend meetings of all audit committees and have private audiences with members of the audit committees at least once each year. In addition, regional and end market management, along with internal audit, supports the Board in its role of ensuring a sound control environment.

Annually, at the year end, each operating company within the Group is required to review its system of internal control, confirm whether it remains effective and report on any material issues arising in this regard. In addition, each operating company and all functions within the Group’s UK headquarters are required to review and confirm compliance with the Standards of Business Conduct and identify any material instances of non-compliance or conflicts of interest identified. The results of these reviews are reported to the relevant regional audit committee and, where appropriate, to the Board’s Audit Committee to ensure that appropriate remedial action has been, or will be, taken where necessary.

The Turnbull Guidance sets out best practice on internal control for UK listed companies to assist them in assessing the application of the Code’s principles and compliance with the Code’s provisions with regard to internal control. This Guidance was updated by the Financial Reporting Council in October 2005, and the updated Guidance applies to listed companies for financial years beginning on or after 1 January 2006. The Board, with advice from its Audit Committee, has completed its annual review of the effectiveness of the system of internal control for the period since 1 January 2006 in accordance with the updated Turnbull Guidance, and is satisfied that this system is in accordance with that Guidance and that it has been in place throughout the year under review and up to date. 

Relations with shareholders

The Board maintains a dialogue with shareholders directed towards ensuring a mutual understanding of objectives. Its primary contact with shareholders is through the Chief Executive and Finance Director, but the Chairman and Chief Operating Officer also maintain contact with major shareholders in order to understand their issues and concerns. Where appropriate, major institutional shareholders are consulted on significant changes to the structure of the Directors’ remuneration. For example, in 2006, the Remuneration Committee’s proposals to introduce a new long term incentive plan were the subject of detailed consultation with a number of institutional investors.

At least twice a year, the Head of Investor Relations presents a report to the Board on the issues considered at meetings between the Company and institutional shareholders. In addition, the Board receives regular reports on developments concerning the holdings of the Company’s main institutional shareholders.

The Annual General Meeting is the principal opportunity for the Board to meet a wide range of investors and for the Chairman to explain the Company’s progress and receive questions from its owners, the shareholders. At the Annual General Meeting on 26 April 2007, the Company will again, in accordance with the Myners Report and best practice, provide for the vote on each resolution to be by poll, using its Registrar’s electronic voting system, rather than by show of hands. This provides for greater transparency and allows the votes of all shareholders to be counted, including those cast by proxy. The voting results are announced on the same day through the Regulatory News Service and on the Company’s bat.com website.

Corporate Social Responsibility

The Corporate Social Responsibility (CSR) Committee supports the Company’s commitment to social and environmental issues. It is chaired by Kenneth Clarke, its other members being all of the Non-Executive Directors. The Executive Directors attend meetings by invitation but are not members. The Committee’s role is to help identify and assess, with management, those significant social, environmental and reputational risks that might impair the Company’s strategic objective to be recognised as a responsible company in a controversial industry. The Committee also evaluates the adequacy of the Company’s policies in this area and makes recommendations for change.

The Company’s Social Report issued in July 2006 details the Company’s social, ethical and environmental performance in 2005, and also provides a retrospective analysis of performance against all commitments made in social reports since the first report was published in 2002. Copies of the report are available on request and through the Company’s bat.com website. A summary report of social, ethical and environmental performance against actions identified for 2006 will be issued later this year. Group companies in 32 countries are engaged in social reporting and others covering 10 countries are holding dialogue and reporting on a key issue. All of the Group’s Social Reports continue to be measured, through rigorous independent review, against the AA1000 Standard and the latest AA1000 Assurance Standard is being incrementally applied.

The principles of CSR continue to be strongly embedded in the Group, with the governance dimension being provided by local and regional CSR committees, overseen by the CSR Committee. Stakeholder engagement continues to be very active. As an example, a dialogue on responsible product stewardship and harm reduction was held under the auspices of the University of Stellenbosch in South Africa in March 2006. The Company has also initiated social reporting dialogue with European Union stakeholders and a report reflecting the dialogue will be published in due course. The focus for CSR governance this year is to further integrate the structural elements of CSR into the business, and regional CSR committees will be reviewing alignment with the CSR key control checklist, first used in 2006.

The Company was selected for the 2007 Dow Jones Sustainability World Index (DJSI World) and its European equivalent, DJSI STOXX, our fifth year of inclusion. British American Tobacco (Malaysia) Berhad was also reselected for the 2007 DJSI World. British American Tobacco was ranked among the UK’s top 40 most responsible companies in the 2006 Corporate Responsibility Index run by Business in the Community (BiTC), the 700 member organisation established in the UK to help business improve its positive impact on society. The Company was rated first in its sector and included in the BiTC’s ‘premier league’ for environmental performance.

American Depositary Receipts

The Company has unlisted trading privileges for its American Depositary Receipts (ADRs) on the American Stock Exchange. None of its securities are listed on any United States securities exchange or registered pursuant to the securities laws of the United States. As a result, the Company is subject to neither the American Stock Exchange listing standards nor the corporate governance rules under the Sarbanes-Oxley Act of 2002. Nevertheless, the Board has chosen, in the interests of good governance, to make a voluntary statement explaining the principal differences and common areas between the Company’s corporate governance practices (as explained above) and those that would be required if the Company were subject to those rules. The updated statement will be available on the corporate governance section of our website at bat.com from the date of publication of the Directors’ Report and Accounts.

Compliance

The Board considers that this Statement on governance provides the information necessary to enable shareholders to evaluate how the Principles of the Code have been applied. The Company has either complied with the Provisions of the Code throughout the year or else a full explanation (in the case of the continuing appointment of Rupert Pennant-Rea) has been provided in this Statement where it has not. The Board therefore considers that the Company has satisfied its obligations under the Code.

In the interests of further transparency, we have also prepared a report which summarises the matters addressed in this Statement, as appropriate, by reference to each Principle and Provision of the Code. The updated report will be available on the corporate governance section of our bat.com website from the date of publication of the Directors’ Report and Accounts.