Corporate governance

The directors consider that during the year BT has fully complied with the Code of Best Practice published by the Committee on the Financial Aspects of Corporate Governance (the "Cadbury Committee") and complies with Section A of the best practice provisions of the Stock Exchange Listing Rules introduced following the publication of Directorsí Remuneration - Report of a Study Group chaired by Sir Richard Greenbury (the "Greenbury Report").

The Board
The Board meets regularly to consider matters specifically reserved for its attention. It sets the strategic direction of the group and monitors overall performance.

The majority of the directors are non-executive and, between them, have a wide range of experience at a senior level in international, legal, marketing, government and diplomatic affairs. Seven of the nine non-executive directors are independent of the management of BT, either being free from any business or other relationships which could materially interfere with the exercise of their judgement or not previously involved in the management of BT.

Non-executive directors have normally been appointed for periods of three years. Towards the end of that period, the Board has considered whether to continue the appointment for a further period. The Board has now agreed that non-executive directors will normally be appointed initially for three years. At the end of that period it will consider whether to continue the appointment, which will then become terminable on twelve monthsí notice from either BT or the director. Appointments will be reviewed again by the Board at the end of the sixth year. Normally, appointments will be for a maximum of ten years.

The non-executive directors provide a strong independent element on the Board, with Sir Colin Marshall, Deputy Chairman, as senior member. However, the Board operates as a single team.

The executive directors have service agreements which are reviewed by the Board Committee on Executive Remuneration. Information about the periods of these contracts is in the report of the Board Committee on Executive Remuneration.

The Board has agreed and established a procedure for directors, in furtherance of their duties, to take independent professional advice, if necessary, at the companyís expense. In addition, all directors have access to the advice and services of the company secretary, the removal of whom would be a matter for the whole Board.

Board committees
Following Sir Peter Bonfieldís appointment as Chief Executive, the Board set up an Executive Committee which he chairs. In addition to Sir Peter, the members of the Committee are the Deputy Chief Executive, the Group Finance Director and other senior executives responsible for BTís operations and central functions. These executives include the heads of BTís three customer-facing divisions and the network and systems division, together with the Secretary and Chief Legal Adviser, the Group Personnel Director and two executives responsible for developing the groupís strategy and plans. The Committee develops the groupís stategy, for Board approval, and oversees implementation. It also finalises (before Board approval) annual quality plans and budgets and reviews operational activities.

The Nominating Committee of the Chairman, Deputy Chairman and three other non-executive directors ensures the Board has an appropriate balance of expertise and ability among the non-executive directors. For this purpose it has agreed, and regularly reviews, a profile of the required skills and attributes. This profile is used to assess the suitability as non-executive directors of candidates put forward by the directors and outside consultants. Candidates short-listed for appointment are met by the Committee before it recommends an appointment to the Board.

The Committee also assesses candidates for executive directorships before it recommends an appointment.

The Board Audit Committee, consisting solely of non-executive directors, is chaired by Sir Colin Marshall. Its terms of reference include reviewing BTís internal controls and published financial reports for statutory compliance and against standards of best practice, and recommending appropriate disclosure to the Board. It also reviews annually the services and fees of the companyís auditors, to ensure that an objective and professional relationship is maintained.

There are also two Board remuneration committees. The Board Committee on Executive Remuneration consists solely of non-executive directors and is chaired by Sir Colin Marshall. It reviews the service agreements of the Chairman and the members of the Executive Committee and reviews their remuneration, including performance-related bonuses. There is a separate report from the Committee (Part 1 and Part 2).

Non-executive directorsí remuneration
In line with the recommendations contained in the Greenbury Report, the remuneration of the non-executive directors is set by the Board, on the recommendation of the Board Committee on Non-Executive Remuneration. The non-executive directorsí remuneration is discussed in the report of the Board Committee on Executive Remuneration.

Internal financial control
The directors are responsible for the groupís systems of internal financial control. Such systems can provide only reasonable and not absolute assurance against material financial misstatement or loss. Key elements are:

  • Formal policies and procedures are in place, including the documentation of key systems and rules relating to the delegation of authorities, which allow the monitoring of controls and restrict the unauthorised use of the groupís assets.

  • Experienced and suitably qualified staff take responsibility for important business functions. Annual appraisal procedures have been established to maintain standards of performance.

  • Forecasts and budgets are prepared which allow management to monitor the key business and financial activities and risks and the progress towards financial objectives set for the year and the medium term; monthly management accounts are prepared promptly providing relevant, reliable and up-to-date financial and other information; significant variances from budget are investigated as appropriate.

  • All investment projects are subject to formal authorisation procedures, with an investment committee, comprising members of the Board, considering major investment projects.

  • The Board Audit Committee reviews reports from management, from the internal auditors and from the external auditors, to provide reasonable assurance that control procedures are in place and are being followed.

  • Formal procedures have been established for instituting appropriate action to correct weaknesses identified from the above reports.
On behalf of the Board, the Board Audit Committee has reviewed the effectiveness of the systems of internal financial control in existence in the group for the year ended 31 March 1996 and for the period up to the date of approval of the financial statements.

Statement of BT Business Practice
BT will comply with the laws and regulations of the territories in which it operates. However, we aim to go further and maintain high international standards of business integrity and professional competence in all our activities worldwide, in our drive to become the most successful worldwide telecommunications group.

The Board has adopted a Statement of Business Practice which sets out the principles that the group will observe. BT requires its employees, agents and contractors to apply these.

Pension fund
BTís main pension fund - the BT Pension Scheme - is not controlled by the Board, but by trustees, who are company and union nominees, with an independent chairman. The trustees look after the assets of the pension fund, which are held separately from those of the company. The pension scheme funds can only be used in accordance with its rules and for no other purpose.

Reporting
A statement by the directors of their responsibilities for preparing the financial statements is included.

The auditors, Coopers & Lybrand, have reported to the company that, in their opinion, the directorsí comments on internal financial control above and on going concern, provide the disclosures required by paragraphs 4.5 and 4.6 of the Code of Best Practice (as supplemented by the related guidance) and are not inconsistent with the information of which they are aware from their audit work on the financial statements, and the statements above appropriately reflect the companyís compliance with the other paragraphs of the Code specified by the London Stock Exchange for their review. The auditors were not required to carry out the additional work necessary to, and do not, express any opinion on the effectiveness of either the groupís systems of internal financial control or its corporate governance procedures, nor the ability of the group or the company to continue in operational existence.

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