policy is to achieve best practice in our standards
of business integrity for all our operations. This includes
a commitment to maintaining the highest standards of
corporate governance throughout the group.
the year there have been recommendations on UK corporate
governance by Derek Higgs and Sir Robert Smith, and
hence proposed changes to the UKs Combined Code
on Corporate Governance. This section of the annual
report describes how BT has applied the Code and where
it stands on some of the key proposed changes resulting
from the above recommendations. The directors consider
that BT has, throughout the year, complied with the
provisions of the current Code.
Board meets every month, except in August. Additionally,
it meets on an ad hoc basis to consider matters
which are time critical. The Board met 14 times
during the 2003 financial year.
Boards principal focus is the overall strategic
direction, development and control of the group. In
support of this focus the Board approves the groups
strategic plans, annual budget, capital expenditure
and investments budgets, larger capital expenditure
proposals and the groups overall system of internal
controls, governance and compliance authorities and
it has oversight and control of the groups operating
and financial performance. These responsibilities are
set out in a formal statement of the Boards role
which, together with the powers of the Operating
Committee and Management Council and the
authorities delegated to individual members of the Operating
Committee, are made available to everyone in the
group on the groups intranet site.
Board, which operates as a single team, is currently
made up of the part-time Chairman, five executive directors
and seven independent non-executive directors. It is
BTs policy that the board will comprise a majority
of independent non-executive directors. The desired
combination of experience, skills and other attributes
that the non-executive directors as a whole are to bring
to the Board is agreed and regularly reviewed by the
Nominating Committee. This profile is used by
the Committee to assess the suitability as non-executive
directors of candidates put forward by the directors
and outside consultants before the Committee meets short-listed
candidates. Between them, the current non-executive
directors bring experience and independent judgement,
gained at the most senior levels, of international business
operations and strategy, marketing, technology, communications
and political and international affairs.
non-executive directors provide a strong independent
element on the Board. Sir Anthony Greener, the Deputy
Chairman, is the senior independent director. In his
capacity as the chairman of the Remuneration Committee,
he meets with BTs major institutional shareholders.
The Deputy Chairman will also continue to be available
to discuss matters with institutional shareholders where
it would be inappropriate for those discussions to take
place with either
the Chairman or the Chief Executive. He will also attend,
at his discretion and in consultation with the Chairman
and the Chief Executive, other meetings with shareholders
during the year. The Chairman and the non-executive
directors hold regular dinners at which they discuss
matters without the presence of the executive directors.
Anthony Greener chairs the Audit and Remuneration
Committees. He is also a member of the Nominating
Committee. Maarten van den Bergh sits on all three
committees. Both directors bring great breadth of relevant
experience to these committees, whose total memberships
are six, five and four directors, respectively.
directors are appointed initially for three years. At
the end of that period the appointment may be continued
by mutual agreement, subject normally to three months
termination notice from either BT or the director. The
longest serving non-executive director has been in office
for nearly three and a half years.
directors are required by the companys articles
of association to be elected by shareholders at the
first AGM after their appointment, if appointed by the
Board. A director must subsequently retire by rotation
at an AGM if he or she was elected or last re-elected
at or before the AGM in the third year before the year
in question. The director may seek re-election.
Chairman and executive directors have service agreements,
which are approved by the Remuneration Committee. Information
about the periods of these contracts is in the Report
on directors remuneration.
Board has a procedure for directors, in furtherance
of their duties, to take independent professional advice
if necessary, at the companys expense. In addition,
all directors have access to the advice and services
of the Secretary, the appointment and removal of whom
is a matter for the whole Board. He advises the Board
on appropriate procedures for the management of its
meetings and duties (and the meetings of the companys
principal committees), as well as the implementation
of corporate governance and compliance within the group.
appointment, the directors take part in an induction
programme when they receive information about BT, the
role of the Board and the matters reserved for its decision,
the terms of reference and membership of the principal
Board and management committees, and the powers delegated
to those committees, the companys corporate governance
practices and procedures, including the powers reserved
to the groups most senior executives, and the
latest financial information about the group. This is
supplemented by visits to key BT locations and meetings
with members of the Operating Committee and other key
senior executives. Throughout their period in office
the directors are continually updated on BTs business,
the competitive and regulatory environments in which
it operates, corporate social responsibility matters
and other changes affecting BT and the communications
industry as a whole, by written
briefings and meetings with senior BT executives. Directors
are also advised on appointment of their legal and other
duties and obligations as a director of a listed company,
both in writing and in face-to-face meetings with the
Secretary. They are reminded of these duties each year
and they are also updated on changes to the legal and
governance requirements of the company and upon themselves
as directors. During the 2003 financial year, for example,
they have received briefings on the recommended changes
to UK corporate governance put forward by Derek Higgs
and Sir Robert Smith, the Enterprise Act and the provisions
of the US Sarbanes-Oxley Act of 2002 that affect BT
because its shares are registered with the US Securities
and Exchange Commission (SEC).
are in place concerning the content, presentation and
delivery of papers for each Board meeting, so that the
directors have enough information to be properly briefed.
Board has agreed that it will carry out an evaluation
of its performance. This will be carried out by questionnaire
and, where appropriate, individual interviews during
summer 2003, with a subsequent review at a board meeting.
Chief Executive, Ben Verwaayen, chairs the Operating
Committee, which meets weekly. The other members
are the Group Finance Director, the Chief Executives
of BT Retail, BT Wholesale and BT Global Services
and the Chief Broadband Officer. The Secretary attends
all meetings. The Committee has collective responsibility
for running the groups business end-to-end.
To do that, it develops the groups strategy
and budget for Board approval, recommends to the
Board the groups capital expenditure and investments
budgets, monitors the financial, operational and
customer quality of service performance of the whole
group, allocates resources across the group within
plans agreed by the Board, plans and delivers major
cross-business programmes and reviews the senior
talent base and succession plans of the group.
sub-committee of the Operating Committee, the
Management Council, meets monthly. It consists
of the Operating Committee members plus a number
of other senior executives. It is an advisory forum
supporting the Chief Executive and the Operating
Committee in policy formulation, in areas such as
public policy, reputation and business practices policies,
human resources and employment policies. Through a specific
sub-committee of its own the Management Council monitors
the performance of the BT Pension Scheme, draws material
matters on pensions policy to the Boards attention,
reviews public policy, regulatory and Government activities
in the pensions area and oversees internal and external
communications on pensions matters.
Nominating Committee, consisting of the Chairman,
the Deputy Chairman and two other non-executive directors,
ensures an appropriate balance of experience and abilities
on the Board, using this evaluation to review annually
the size and composition
of the Board and to recommend any proposed changes to
the Board. It keeps under review the need for appointments
to the Board, prepares a description of the specific
experience and skills needed for an appointment, considers
candidates who are put forward by the directors and
external consultants, and recommends to the Board the
appointments of all directors after having met short-listed
candidates. It also reviews the time required from the
Deputy Chairman and other non-executive directors to
carry out their duties and advises the Board on succession
planning for the positions of the Chairman, Deputy Chairman,
Chief Executive and all other Board appointments. In
the Boards opinion, it is appropriate for the
Chairman to chair the Nominating Committee in
its task of reviewing and agreeing the structure of
the board and considering candidates as directors, both
executive and non-executive. The Committee met once
during the 2003 financial year.
Audit Committee, comprising solely independent
non-executive directors, is chaired by Sir Anthony Greener.
The members of the Committee all bring relevant experience
from senior executive levels. The Committee recommends
the appointment and reappointment of the companys
auditors, ensuring that key partners are rotated at
appropriate intervals, and considers the resignation
or dismissal of the auditors, recommending to the Board
appropriate action to appoint new auditors. It reviews
the auditors performance, including the scope
of the audit, and recommends to the Board appropriate
remuneration. The Committee monitors the extent of non-audit
work to be performed by the companys auditors
to ensure that the provision of non-audit services does
not impair their independence or objectivity. It discusses
with the auditors the scope of their audits before they
commence, reviews the results and considers the auditors
Management Letter and reports the results of those reviews
to the Board. The Audit Committee reviews the
companys published financial results, the Annual
Report and Form 20-F and other published information
for statutory and regulatory compliance. It also reviews
the disclosure made by the Chief Executive and Group
Finance Director during the certification process for
the annual report about the design or operation of internal
controls or material weaknesses in the controls, including
any fraud involving management or other employees who
have a significant role in the companys financial
controls. The Board, as required by UK law, takes responsibility
for all disclosures in the annual report. The Audit
Committee monitors and reviews the standards of
risk management and internal control, the effectiveness
of internal control, financial reporting, accounting
policies and procedures, and the companys statements
on internal controls before they are agreed by the Board
for each years annual report. It also reviews
the companys internal audit function and its relationship
with the external auditors, including internal audits
plans and performance. The Group Finance Director and
the Secretary attend its meetings. Each year, the Committee
sets aside time to seek the
views of the companys internal and external auditors
in the absence of executives. The Committee met four
times during the 2003 financial year. At its meetings
the Committee has reviewed the companys full year
and quarterly results and its Annual Report and Form
20-F and considered the adequacy of the financial systems
that have produced those results. It has reported its
views to the Board so it has been able to approve the
results announcements and the annual report for publication.
It has also during the 2003 financial year considered
the groups risk register as submitted to it by
the Management Council and reviewed the companys
internal control, accounting systems and related matters.
Committee has agreed, for the 2004 financial year, in
accordance with the Sarbanes-Oxley Act, to:
establish a process for dealing with complaints received
by the company regarding accounting, internal accounting
controls or auditing matters, and the confidential,
anonymous submission by employees of concerns regarding
questionable accounting or auditing matters.
the adoption of a specific code of ethics for the
Chief Executive, Group Finance Director and Director
Group Financial Control, which is consistent with
BTs overall statement of business ethics (see
of business practice).
Remuneration Committee comprises solely independent
non-executive directors and is chaired by Sir Anthony
Greener. It met seven times during the 2003 financial
year. Further details about the Committee are included
in the Report
on directors remuneration.
memberships are shown in
Board of directors and Operating Committee.
control and risk management
Board is responsible for the groups systems
of internal control and risk management and for
reviewing the effectiveness of those systems. Such
systems are designed to manage, rather than eliminate,
the risk of failure to achieve business objectives;
any system can provide only reasonable and not absolute
assurance against material misstatement or loss.
Board also takes account of significant social, environmental
and ethical matters that relate to BTs businesses.
The companys workplace practices, specific environmental,
social and ethical risks and opportunities and details
of underlying governance processes are dealt with in
the Our people
commitment to society sections of this report.
has processes for identifying, evaluating and managing
the significant risks faced by the group. These processes
have been in place for the whole of the 2003 financial
year and have continued up to the date on which this
document was approved. The processes are in accordance
with the guidance for directors published in the UK
in September 1999.
assessment and evaluation takes place as an integral
part of the groups annual strategic planning cycle.
The group has a detailed risk management process which
identifies the key risks facing the group and
each business unit. This information is reviewed by
senior management as part of the strategic review. The
groups current key risks are summarised in Risk
factors of this document.
key features of the risk management process comprise
the following procedures:
executives, led by the groups Risk Manager,
review the groups key risks and have created
a group risk register. This is reviewed by the Management
Council before being approved by the Board.
lines of business carry out risk assessments of their
operations, have created registers relating to those
risks, and ensure that the key risks are addressed.
Line of business audit committees monitor the standards
of internal controls in the lines of business.
management report regularly to the Group Finance Director
on the operation of internal controls in their area
Chief Executive receives annual reports from senior
executives with responsibilities for major group operations
with their opinion on the effectiveness of the operation
of internal controls during the financial year.
groups internal auditors carry out continuing
assessments of the quality of risk management and
control. They also promote effective risk management
in the lines of business operations.
Audit Committee, on behalf of the Board, considers
the effectiveness of the operation of internal control
procedures in the group during the financial year.
This follows consideration of the matter by the Management
Council. The Audit Committee reviews reports
from the internal auditors and from the external auditors
and reports its conclusions to the Board. The Audit
Committee has carried out these actions for the
2003 financial year.
joint ventures and associates, which BT does not control,
outside the UK have not been dealt with as part of the
group for the purposes of this internal control assessment.
executives, led by the Chief Executive and the Group
Finance Director, hold meetings with the companys
principal institutional shareholders to discuss
the companys strategy, financial performance
and specific major investment activities. As explained
in the Report
on directors remuneration, we also maintain
contact, when appropriate, through the chairman
of the Remuneration Committee and other senior
executives to discuss overall remuneration policies
and plans. Contact with institutional shareholders
(and with financial analysts, brokers and the media)
is controlled by written guidelines to ensure the
protection of share price sensitive information
that has not already been made generally available
to the companys shareholders.
are continuing our policy that shareholders vote on
the annual report at the AGM. Shareholders will also
be asked this year to vote on the Report
on directors remuneration as required by the
Directors Remuneration Report Regulations 2002,
having been asked
to vote on the companys remuneration policy at
is part of our policy to involve shareholders fully
in the affairs of the company and to give them the opportunity
at the AGM to ask questions about the companys
activities and prospects. We also give the shareholders
the opportunity to vote on every substantially different
issue by proposing a separate resolution for each issue.
The Boards opinion is that the re-election and
the fees of the auditors are inter-related matters and
should therefore be dealt with in one resolution.
proxy votes for and against each resolution, as well
as abstentions, will be counted before the AGM and the
results will be made available at the meeting after
the shareholders have voted on each resolution on a
show of hands.
is our policy for all directors to attend the AGM if
at all possible. Whilst, because of ill health or other
pressing reasons, this may not always be possible, in
normal circumstances this means that the chairman of
the Audit and Remuneration Committees
is at the AGM and is available to answer relevant questions.
Annual Review and, if requested, the Annual Report and
Form 20-F, together with the Notice of the AGM, are
sent to shareholders in the most cost-effective fashion,
given the large number of shareholders. We aim to give
as much notice as possible and at least 21 clear days,
as required by the companys articles of association.
In practice, these documents are being sent to shareholders
more than 20 working days before the AGM.
procedures ensure the timely release of share price
sensitive information and the publication of the companys
financial results and regulatory financial statements.
audit services provided by the external auditors
a result of regulatory or similar requirements,
it is necessary to employ the companys external
auditors for certain non-audit work. In order to
maintain the independence of the external auditors,
the Board has determined policies as to what non-audit
services can be provided by the companys external
auditors and the approval processes related to them.
Under those policies work of a consultancy nature
will not be offered to the external auditors unless
there are clear efficiencies and value added benefits
to the company. The Audit Committee monitors
the level of non-audit fees paid to the external
of business practice
reinforce our commitment to achieve best practice
in our standards of business integrity, BT has a
written statement of business practice (The Way
We Work). The statement covers all our operations
and reflects the expectations in the area of corporate
governance and business practice standards. A copy
of the statement has been sent to every employee
and is also available on the companys intranet
high-level principles are supported by a comprehensive
communications programme and online
training. A confidential helpline and e-mail facility
are also available to employees who have questions about
the application of these principles. We also continue
to require our agents and contractors to apply these
principles when representing BT.
has always been BTs policy that no company
in the group shall make cash contributions to any
political party. This policy continues. However,
the Companies Act 1985 requires companies to obtain
shareholder authority before they can make donations
to EU political organisations (which includes UK
political parties). The definition of political
donations used in the Act is very much broader than
the ordinary sense in which these words are used.
As a result, it covers activities which form part
of normal relationships between BT and the political
machinery. These activities are not designed to
support any political party or to influence public
support for a particular party and would not be
thought of as political donations in the everyday
sense of these words. They are entirely non-political
in nature and are designed so that BT can make MPs
and others aware of key industry issues and matters
affecting the company.
authority we are requesting from shareholders at the
AGM is not designed to change the companys stated
policy of not making cash contributions. It will, however,
ensure that BT acts within the provisions of the current
UK law when carrying out the above activities. They
are carried out on an even-handed basis related broadly
to the major UK political parties electoral strength
and the company believes that they make an important
contribution to the success of BT.
two main pension funds the BT Pension Scheme
and the BT Retirement Plan are not controlled
by the Board but by separate trustees who are company
and union nominees, under independent chairmen.
The trustees look after the assets of the funds,
which are held separately from those of the company.
The pension schemes funds can only be used
in accordance with their respective rules and for
no other purpose.
Sarbanes-Oxley Act of 2002
has securities registered with the US Securities
and Exchange Commission (SEC). As a result, BT is
obliged to comply with those provisions of the Sarbanes-Oxley
Act (the Act) applicable
to foreign issuers. BT will comply with the legal
and regulatory requirements introduced pursuant
to this new legislation, in so far as they are applicable
to the group.
accordance with the recommendations issued by the SEC,
BT has established a Disclosure Committee comprising
appropriate senior executives which reports to the Chief
Executive and Group Finance Director.
Chief Executive and Group Finance Director after evaluating
the effectiveness of BTs disclosure controls and
procedures within 90 days of the date of the groups
Annual Report and Form 20-F, have concluded that, at
that date, BTs disclosure controls and procedures
were effective to ensure that material information relating
to BT was made known to them by others within the BT
group particularly during the period in which the Annual
Report and Form 20-F was being prepared. The Chief Executive
and Group Finance Director have also provided the certifications
required by the Act.
were no significant changes in BTs internal controls
or in other factors that could significantly affect
these controls subsequent to the date the Chief Executive
and Group Finance Director completed their evaluation,
nor were there any significant deficiencies or material
weaknesses in BTs internal controls requiring