Why corporate responsibility matters

The Group believes that commitment to corporate responsibility delivers competitive advantage and contributes to the delivery of the Group's business strategy.

The Group's Global Code of Business Ethics underpins our values and engages our stakeholders in building and maintaining the Group's reputation.

Conducting business in an ethical and responsible way helps the Group in a number of ways:

• we attract and retain the best people;
• we build goodwill and maintain successful working relationships with customers, suppliers and governments; and
• we encourage the giving of donations to charities which support the global communities in which we conduct business.

The sustained wealth, created by providing thousands of highly skilled jobs, represents the Group's single greatest contribution to those communities.

The Group supports its own employees with well-developed policies and practices in occupational health, safety and environment, employment policy and employee learning and development.

External recognition

The Group's achievements during the year were recognised when it held its high ranking position in the 2005 UK Business in the Community Corporate Responsibility Index. It also retained its inclusion in the Dow Jones Sustainability Indices.

Health, safety and the environment (HS&E)

The Group's approach to HS&E is first and foremost shaped by the desire to avoid harm to people and the environment, and it is also recognised that good HS&E performance is synonymous with good business performance. The Rolls-Royce vision is that it will become known for the excellence of its health, safety and environmental performance.

The Chief Executive chairs the Company HS&E committee, which is comprised of the sector presidents and functional directors and is responsible for setting policy, objectives and targets, defining strategy and reviewing performance.

The Group's objectives are to protect health, prevent injury and reduce environmental impact. Performance levels are achieved by the implementation of an integrated HS&E management system, which utilises a structured risk management approach. All the Group's businesses have gained third-party certification to the international environmental management systems standard ISO 14001.

The Group continues to participate in the voluntary UK carbon dioxide emissions trading scheme and the Chicago Climate Exchange and has programmes in place to reduce carbon dioxide emissions.

It is with great regret that the Group reports a fatal travel accident during 2006 involving a service engineer. The Major Incident Board, which is chaired by the Chief Operating Officer, has reviewed this tragic accident and measures have been implemented to avoid reoccurrence.

The Group's HS&E audit programme independently assesses the effective implementation of all elements of the HS&E management system. Audits completed in 2006 covered operations in the UK and Norway.

The Group operates three sites in the UK which manufacture, test and support nuclear reactor cores for Royal Navy submarines. All these sites continue to maintain a strong health, safety and environmental performance, which is independently monitored by the Nuclear Propulsion Assurance Committee, chaired by the Director – Engineering and Technology.

The Group recognises HS&E initiatives and related improvements in performance through Company HS&E Awards presented by the Chief Executive. Recognition is also given to those sites achieving zero lost time injuries over the year.

In 2006, the Group was again placed first in its business sector in the Business in the Environment index of corporate environmental management and also retained 'Premier League' status. Rolls-Royce was selected as the UK entry in the management category for the European Business Awards for the Environment 2006.

The Group continues to build on these achievements, including running programmes to support the development of HS&E management systems in its suppliers. This has included supplier workshops in the UK and North America and a continuation of the supplier HS&E visit programme. The number of suppliers certified to ISO 14001 in 2006 more than doubled.

A full report on the Group's HS&E performance over the period 2004-06 will be published in April 2007. Independent assurance will be provided by Deloitte & Touche LLP.

Environment: product performance

The Chief Executive has highlighted earlier in this report that Rolls-Royce is both committed and well placed to find solutions to the substantial challenges posed by climate change. The Group's environmental team closely monitors developments in the underpinning science and their advice helps steer the significant research and development programmes, as well as providing input to the overall business strategy. Such knowledge is also vital to the design process.

In addition, the Group obtains independent expert advice from its Environmental Advisory Board. This Board is made up of distinguished academics who are leading authorities in their respective fields.

In the aviation sector, the fuel efficiency of Rolls-Royce aero engines has improved by 20 per cent over the past 25 years. The Group is playing a leading role in the achievement of the long-term environmental goals set by the Advisory Council for Aeronautics Research in Europe and is investing substantial funds in research and development and in the introduction of new products with enhanced environmental performance.

Rolls-Royce is an active member of the UK Sustainable Aviation Council (SAC), which published a sustainable aviation strategy in 2005, the first of its kind, and its first progress report in 2006. The SAC is an industry body committed to building a sustainable future, which comprises manufacturers, airlines, airports and air navigation service providers.

The Group is involved in a range of product development initiatives across all business sectors. These include alternative energy and low-carbon technologies such as the development of the high-efficiency solid oxide fuel cell. These fuel cells offer other environmental benefits, such as low noise and improved air quality.

The Group endorses the principles of emissions trading, a mechanism which over time should enable markets to identify and invest where the most cost-effective improvements can be made.

A full report on the environmental performance of the Group's products will be published in April 2007.

Supply chain

The Group sets expected business requirements and performance standards through its supplier quality system, 'Supplier Advanced Business Relationships' (SABRe). SABRe includes a supplier code of conduct and a health, safety and environmental management system. Regular meetings are held between Rolls-Royce and all levels of suppliers.

The Rolls-Royce purchasing code of conduct for employees complements the supplier code of conduct and ensures that employees act consistently with suppliers.

Partnership approach

The Group's partnership approach to its supply chain:

• delivers mutual business benefits;
• minimises the environmental impact of business operations;
• encourages the highest standards of ethical behaviour; and
• promotes human rights.

We are establishing local purchasing offices around the world, which will develop mutual understanding between Rolls-Royce and its network of suppliers.

Regular visits are made to suppliers to assess their performance and an ongoing programme of communication continues to reinforce supplier partnerships.

The introduction of Exostar, an e-business system accessible by our suppliers provides significant benefits including:

• enabling virtual teamworking;
• reducing the need to travel; and
• encouraging more regular and effective communication.

The sourcing policies of Rolls-Royce in the US reflect US Government regulations on small and disadvantaged businesses.

Social responsibility

During 2006, the Group concentrated on updating its supplier policy to include social responsibilities. New guidelines will be issued during 2007.

The Group is recognised for its continuing contribution to corporate responsibility through the recycling of material in its supply chain where significant metal recycle levels have been achieved. Rolls-Royce has also introduced returnable container loops across its major UK suppliers to reduce the use of disposable packaging.

Occupational health

The Group recognises the link between physical and mental health and the need for employees to work effectively and successfully with proper regard for their personal well-being.

In response, the Occupational Health Policy Group develops the Group strategy and identifies relevant areas of changing occupational health needs.

The Group is committed to promoting best practice in occupational health. It hosted the UK national launch of a joint Faculty of Public Health and Faculty of Occupational Medicine initiative on 'Creating a healthy workplace'.

Key areas of focus

The occupational health strategy concentrates on four key areas:

• screening and surveillance;
• rehabilitation;
• health promotion; and
• education.

In screening and surveillance, stringent targets are set for assessing fitness for work, reducing occupational disease and work-related ill-health. A campaign to reduce noise-induced hearing loss continues and the Group has an international reputation for its management of hand-arm vibration syndrome cases.

The priority in rehabilitation is early intervention and the active case management of individuals. Training assists managers in managing absence and rehabilitation effectively. The importance of health and productivity was included in the Group's management development programmes in 2006.

Health promotion in 2006 included two awareness campaigns on physical activity and alcohol. Employees were encouraged to 'Get active, Get up & Go' to highlight the benefits of physical activity on health and well-being. The aim of the alcohol campaign, 'Know your limits', was to raise awareness of safe drinking levels and the effects of alcohol on health.

External recognition

Rolls-Royce was a winner of the National Obesity Forum Primary Care Award for Excellence in Weight Management 2006. This award recognised its achievements in the UK campaign, 'Reduce Hazardous Waist!'.

Independent research for Norwich Union Healthcare on ill-health and absence cited Rolls-Royce as promoting a healthy workplace and proactively managing adverse health effects to achieve a reduction in absence.

Dr Ian Lawson, the Group's Chief Medical Officer, was made a Fellow of the American College of Occupational and Environmental Medicine in 2006.

Employment policy

The Group's employment policies continue to develop the flexibility, capability and motivation of all employees.

In recent years, we have introduced a range of policies including:

• modern working practices in operations;
• improved methods of encouraging employee involvement; and
• a global approach to attracting and retaining talented people.

Employee involvement

The Group provides competitive pay and benefits for employees in each locality and actively encourages share ownership. All employees are regularly invited to participate in ShareSave plans and the workforce has committed to save some £90 million to buy shares in the Company. Statutory arrangements enable UK employees to receive part of their annual bonus in Company shares and to make monthly share purchases from their salary.

We continue to work closely with employee representatives to improve the quality of employee engagement and participation in the development of the business. This progress is reinforced by the continuing development of the Global Council. The Council comprises employee representatives from around the world and provides a structured approach to consultation and communication.

During 2006, the Global Council met twice and additional interim meetings of its Executive Committee ensured that key issues identified by the Council were progressed.

The Group launched its second Global Employee Engagement Survey in November 2006 (previous survey 2004), and the results will be fed back to employees in the first half of 2007. All employees will have the opportunity to discuss the issues emerging from the survey and will be involved in formulating action plans to address them.

Human rights and ethics

In 2006, following consultation with the Global Council, the Group agreed a Global Code of Business Ethics and Human Rights policy.

A global training and communication programme for leaders and employees will take place during 2007 to help promote effectively and widely the Global Code of Business Ethics.

Diversity

The Group is committed to developing a diverse workforce and equal opportunities for all. In support of the Global Diversity Policy, a Global Steering Group was established and improvements made to local policies.

These policies support initiatives to encourage more women and people from minority backgrounds to pursue careers in engineering. In 2006 graduate recruitment comprised 30 per cent females and 23 per cent international trainees. The Group also introduced a targeted graduate programme in Asia.

In addition, the Group organised a global conference for women role models and a women's leadership conference in the US. We also helped the launch of a network for female employees in the UK and plan to support similar networks in other countries.

The Group's policy is to provide, wherever possible, employment training and development opportunities for disabled people. It is also committed to supporting employees who become disabled and to helping disabled employees make the best possible use of their skills and potential.

Learning and development

The Group has continued to invest in the training and development of employees, customers and suppliers to strengthen its competitive position. In 2006, expenditure on the education, training and professional and leadership development of employees was £30 million.

Employees

The Group continued to focus on developing its leadership by strengthening its succession plans and talent pools. It also strengthened its management and development programmes by joining the consortium Global Leadership 20/20 programme, led by the Amos Tuck School of Business at Dartmouth College in the US.

Training programmes continued to help improve processes and to raise standards of performance and customer satisfaction. New programmes were introduced to promote a new services behaviour.

Training was delivered to support the introduction of new factories and the continued development of global operating systems. This included:

• modern working practices;
• team-based working; and
• the Rolls-Royce Production System.

Training in support of Product Lifecycle Management and Enterprise Resource Planning continues to enable the Group and its supply chain to deliver products and services of a higher quality and with greater efficiency, in support of the Group's services strategy.

We have increased the availability of online learning and seen a 250 per cent increase in the use of e-learning packages over the past 12 months.

During the year, the Group recruited 154 graduates and 155 apprentices and technicians. In addition, 599 undergraduate students were employed for training periods of between two and 12 months. At the end of the year, a total of 295 graduates were on formal training programmes and there were 420 apprentices and technicians worldwide. In 2006, the Group was ranked second in its business sector and 23rd overall in the UK Times Newspaper Top 100 Graduate Employers list.

At the end of 2006 the Group employed 38,020 employees in over 50 countries.

Educational sponsorship

The Group continues to work closely with schools, colleges and universities to promote science, engineering, technology and enterprise. Our policy is to work with governments, local and national institutions to widen students' experience of industry and promote careers in the aerospace, marine and energy sectors. In 2006, this included running two cohorts of the Young Apprentice programme in the UK for 14-16 year olds. During 2006, Rolls-Royce also took an active part in the development of the National Skills Academy for Manufacturing in the UK.

In 2006, the Group hosted an awards dinner to recognise the first winner of the Rolls-Royce Science Prize. The prize promotes and rewards innovation and excellence in science teaching throughout the UK and the Republic of Ireland. The winning team, Crown Woods School from London, was awarded £20,000 to invest in science education. The Group gives a total of £120,000 in prize money each year as part of the Science Prize.

Another flagship education activity, Profitable Pursuit, is a business simulation to stimulate enterprise education in schools. During 2006, over 120 teachers and advisors were trained. Other projects include Open Industry, Specialist Schools and Science and Engineering Ambassadors in the UK. In the US, Rolls-Royce supports 'Project Lead the Way' to encourage students to consider careers in engineering and technology.

Customers

The Group continues to meet customer training needs with management and business education and, during 2006, over 17,000 days of training were delivered to Rolls-Royce customers. This was completed either through the Group's dedicated Customer Training facilities in North America, Europe and China, or at its customers' locations.

Community investment

Rolls-Royce has a long and successful history of community involvement which benefits the societies in which it operates and contributes to its long-term business success.

Structure

The Group community investment and sponsorship committee, chaired by the Chief Executive, is responsible for the Group's policy on charitable donations. The Group committee is supported by a number of national committees which operate within the following guidelines:

'As a forward-looking, innovative and global company, Rolls-Royce Group plc is committed to being a good corporate citizen in its operations throughout the world. The Group's policy on donations is to direct its support primarily to causes with educational, engineering and scientific objectives, as well as to social objectives connected with the Group's business and place in the wider community.'

A list of the principal donations made in the year is available upon request to the Company Secretary.

Focused support

In 2006, the Group achieved sixteenth position in the UK Guardian Newspaper's Giving List, demonstrating its commitment to supporting the communities in which its employees live and work around the world. Our policy is to give priority to activities supporting education, the environment, arts and culture, and economic and social regeneration. This approach supports the Group's values of reliability, integrity and innovation.

In 2006, the Group's total charitable donations amounted to £1.2 million. During 2006, charitable donations in the UK amounted to £728,000. They included support for The Prince's Trust, Community Foundations, SS Great Britain, The Industrial Trust and Duxford AirSpace.

The Group has made charitable donations of £507,000 in other key regions. In North America, this included support for the work of United Way, the Smithsonian National Air and Space Museum, the United States Air Force Museum Foundation and Purdue University. In Germany, we supported a range of organisations, including the Brandenburg Summer Festival, World Youth Day and the International Airport Race. In the Nordic countries, Rolls-Royce supported a number of local sports and arts-based projects.

In addition to charitable donations, contributions of £2.5 million were made by the Group, primarily in sponsorship and to educational programmes.

The Group also finances the administration of a Payroll Giving Scheme for UK employees. In 2006, the scheme helped employees to donate over £400,000 to more than 200 charities of their choice. Fifteen per cent of employees take part in the scheme, one of the highest levels of participation in the UK and the scheme is recognised as Gold Award standard by the UK Government's Payroll Giving Charter Mark. In addition, 37 per cent of employees in North America have contributed in excess of £180,000 to good causes through United Way schemes, a percentage of which is matched by the Company.

In 2006, each completed questionnaire in the Global Employee Engagement Survey, guaranteed a donation to the Rolls-Royce Disaster Relief Fund, created to continue the activities undertaken following the 2004 tsunami and hurricane Katrina.

In addition to providing financial support, the Group encourages employees to participate in community projects to enhance their own skills and experience. In 2006, examples included:

• a series of team challenges which involved 160 senior managers completing community projects in Berlin during the annual Senior Management Conference;
• 250 new trainees taking part in a challenge in the UK as part of their induction programme;
• providing business mentors and advisers through The Prince's Trust, Young Enterprise and Arts & Business;
• running successful mentoring and literacy programmes for school pupils through education business partnerships in the UK and the Helping One Student to Succeed (HOSTS) programme in Indianapolis, USA
• supporting employees who are School Governors;
• participating in the UK's Science and Engineering Ambassadors Scheme; and
• supporting students in the For Inspiration and Recognition of Science and Technology (FIRST) robotics programme in the US.

The Group also offers support in-kind to local community organisations by donating surplus computer equipment and office furniture. It also provides places on in-house training courses, and offers the use of meeting rooms and office accommodation.

Rolls-Royce is a member of Business in the Community and actively supports Common Purpose programmes across the UK. These two organisations aim to promote greater business awareness and involvement in wider community issues and to encourage more employee participation.