
	Profile & highlights
	Creating value
	At a glance
	Acting Chairman's remarks
	Chief Executive's review
	Review of operations
	Finance Director's review
	Board of directors
	Report of the directors
	Results for the year
	Directors
	Corporate governance
	Corporate Social Responsibility
	Going concern
	Share capital
	Annual General Meeting
	Directors' remuneration
	Financial statements & notes
	Shareholders' information
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Corporate governance

The Company is committed to the highest standards of corporate governance. The Board confirms that the Company has complied with the provisions of the Combined Code as it applied in 2003. This report and, where appropriate, the directors’ remuneration report describe how the Board has applied the principles and complied with the provisions of the Combined Code.

The Board has noted the recommendations of the revised Combined Code published by the Financial Reporting Council on July 23, 2003, which apply to reporting periods beginning on or after November 1, 2003. The Board confirms that it will report its compliance with the recommendations of the revised Combined Code in the 2004 Annual Report. In the meantime, the Board has taken steps to implement the provisions of the revised Code and the progress made by the Company in response to the Code is described in the following sections of this report.

The Board

The Board comprises a non-executive chairman, a chief executive, five other executive directors and eight non-executive directors.

During the year, the division of responsibilities between the Chairman and Chief Executive has been established in writing and agreed by the Board. Lord Moore of Lower Marsh is non-executive Deputy Chairman of the Company and the Company’s Senior Independent Director.

In December 2003, Mr D E Baird suffered a stroke and is not expected to return to his duties before March 2004. In Mr D E Baird’s absence Lord Moore has served as Acting Chairman and will continue to do so until Mr D E Baird is able to resume his duties as Chairman. The Board has concluded that Lord Moore’s performance of this role on a temporary basis does not affect his status as an independent non-executive director.

Biographical details of the Board, including other significant commitments, are given in the Board of directors.

Information and Professional Development

The Chairman has taken steps to ensure that on joining the Board, newly appointed directors follow a comprehensive induction programme and receive relevant information on the Group. Over the induction period, new directors visit key sites and meet with Business Sector Presidents and other employees to gain knowledge and understanding of the Group and its business. In addition, an existing executive director acts as mentor to each newly appointed non-executive director, providing guidance and information as required.

There is an agreed procedure for directors to take independent professional advice at the Company’s expense. This is in addition to the access every director has to the Company Secretary and the General Counsel.

Board Charter

During the year the Board has reviewed its processes and its operational effectiveness and has established the following Charter of its core responsibilities:

Primary goal

Creating value for the long-term investor in the Company is the primary goal of directors and underpins all decisions taken by the Board.

The Board’s tasks

Consistent with this primary goal, the Board’s tasks are to:

– ensure that, when executed, the Group’s strategic and financial plans generate shareholder value and that the necessary financial and human resources are in place to deliver those plans. The Board will review and approve major allocations of capital and significant business decisions to ensure that they are fully in line with the primary goal;

– ensure that effective controls are in place to manage risk;

– monitor progress and ensure that the Group’s financial and other forms of reporting present an accurate assessment of the Group’s position and prospects and are effectively communicated to shareholders and other stakeholders;

– ensure that the Group meets the highest legal and ethical standards;

– evaluate continuously the performance of the Group’s senior executives and develop an effective remuneration policy. Ensure that succession plans are in place for Board directors and senior executives and approve candidates for election to the Board;

– establish the necessary committees to enable the Board to fulfil its charter; and

– evaluate the effectiveness of the Board and its committees at least annually.

Operation of the Board

The Board has a schedule of matters reserved to it for decision, which is updated annually. The requirement for Board approval on these matters is understood and is communicated widely throughout the Group.

To enable the Board to function effectively, the directors have full and timely access to all relevant information.

Board meetings

The Board met eight times during the year. Details of the directors’ attendance are contained in the table below.

Board committees

In 2003 the Board reviewed the terms of reference and membership of Board committees in the light of the revised Combined Code. Details of the membership and the principal terms of reference are set out in the Report of the directors and the Directors' remuneration report. The full terms of reference for the principal Board committees are available on the Investors section of the Group’s website at www.rolls-royce.com.

As part of its review of committees, the Board concluded that the Health, Safety and Environment Committee and the Nuclear Propulsion Assurance Committee should operate as executive committees reporting to the Board through the Chief Executive.

Attendance at the three principal Board committees is shown in the table below.


Attendance at meetings of the Board and its principal committees in 2003
Director	Board		Audit		Nominations		Remuneration
	Held*	Attended	Held*	Attended	Held*	Attended	Held*	Attended
Mr D E Baird	8	7			6	5
Sir John Rose	8	8			6	6
Mr J P Cheffins	8	8
Mr C H Green	8	8
Mr J M Guyette	8	8
Dr M G J W Howse	8	8
Mr A B Shilston	8	8
Hon A L Bondurant	2	2			1	1
Mr P J Byrom	8	8	4	4	5	4	6	5
Mr C-P Forster	2	1					1	1
Lord Moore of Lower Marsh	8	8	4	4	6	6	5	4
Sir Robin Nicholson	8	8	4	4	6	6	5	5
Mr I C Strachan	2	1
Mr C G Symon	8	8			5	5	6	6
Sir John Weston	8	8			5	5	6	6
*During the period a director was in office or a member of a committee

The Group Executive

The Group Executive is responsible for the running of the Group within the strategy determined by the Board. It is chaired by Sir John Rose, Chief Executive, and its other members are:

Mr A Arendt, Chairman Rolls-Royce Deutschland Ltd & Co KG
Mr B Baker, Commercial Director and General Counsel
Mr C E Blundell, Company Secretary and Director of Government Relations
Mr J P Cheffins, Chief Operating Officer
Mr E T Curley, President – Energy Business
Mr C H Green, President – Defence Aerospace
Mr J M Guyette, President and Chief Executive Officer of Rolls-Royce North America Inc.
Mr C J Hole, Director of Procurement
Dr M G J W Howse, Director – Engineering and Technology
Dr S Lanyado, President – Marine Business
Mr I A Lloyd, Managing Director – Aero Repair and Overhaul
Dr M Lloyd, Director – Gas Turbine Operations
Mr J R Rivers, Director – Human Resources
Mr A B Shilston, Finance Director
Mr M J Terrett, President – Civil Aerospace

Nominations committee

The nominations committee (the committee) is chaired by the Chairman of the Company, Mr D E Baird. Its other members are the Hon A L Bondurant (from November 14, 2003), Lord Moore of Lower Marsh, Sir Robin Nicholson and Sir John Rose. Mr P J Byrom, Mr C G Symon and Sir John Weston served as members of the committee until November 14, 2003. The committee met six times during the year. The number of meetings attended by each member is shown in the table on the Corporate governance page.

The committee makes recommendations to the Board on the appointment and the reappointment of executive and non-executive directors and on the membership of Board committees. It is assisted in the former task by external recruitment consultants. The committee reviews succession planning for appointments to the Board and to other senior positions within the Group. It also leads the annual process by which the Board evaluates its collective performance and that of individual directors.

In carrying out its tasks, the committee gives careful consideration to the balance of skills required on the Board, including the need to reflect diversity, international experience and managerial and business skills. Before making an appointment, the committee satisfies itself that the individual appointee will have sufficient time available to discharge his or her responsibilities effectively.

In the first quarter of each year, the committee reviews the performance of each director of the Company and recommends to the Board which directors should be proposed for re-election at the next AGM. The performance of the Chairman is appraised at a meeting of the non-executive directors chaired by the Deputy Chairman.

Remuneration committee

The remuneration committee’s (the committee) membership and principal terms of reference are set out in the Directors’ remuneration report. The committee met six times during the year. The number of meetings attended by each member is shown in the table Attendance at meetings of the Board and its principal committees in 2003 in the Report of the directors.

Audit committee

The audit committee (the committee), which consists exclusively of independent non-executive directors, is chaired by Mr P J Byrom who has recent and relevant financial experience, and its other members are Lord Moore of Lower Marsh, Sir Robin Nicholson and Mr I C Strachan (from November 14, 2003). The committee met four times during the year. The number of meetings attended by each member is shown in the table in the Report of Directors, Attendance at meetings of the Board and its principal commitees in 2003.

The committee has responsibility for reviewing the Group’s financial reporting and accounting policies, including reviewing announcements to the London Stock Exchange. It is also responsible for the relationship with the external auditors and for the internal audit function, which is termed Business Assurance.

The committee is responsible for recommending to the Board the appointment of the external auditors. It is also responsible for reviewing the scope of the audit, approving the audit fee and, on an annual basis, satisfying itself that the auditors are independent.

In addition, the committee is responsible for assessing the Group’s internal controls and its systems for assessing and mitigating financial and non-financial risk.

In order to safeguard auditor independence and objectivity, the following policy is applied in relation to services provided by the auditors:

Audit related services – these are undertaken by the auditors as it is work that they must, or are best suited, to perform. It includes formalities relating to borrowings, shareholder and other circulars, risk management services, various regulatory reports and work in respect of acquisitions and disposals.

Tax, accounting and mergers and acquisitions – The auditors are used for this work where they are best suited to undertake it. All other significant consulting work in these areas is put out to tender.

All other advisory services/consulting – The auditors are generally prohibited from providing these services.

Throughout the year the committee monitors the cost of non-audit work undertaken by the auditors and is, therefore, in a position to take action if at any time it believes that there is a risk of the auditors’ independence being undermined through the award of this work.

The committee reviews and approves the Business Assurance work programmes and ensures that this function is adequately resourced and that it is coordinated with the work of the external auditors.

Risk committee

The risk committee (the committee) is chaired by Sir John Rose and its other members are Mr J P Cheffins, Mr C H Green, Mr J M Guyette, Dr M G J W Howse and Mr A B Shilston. The committee is accountable for the Group’s risk management and for reporting key risks and the associated mitigating actions to the Board.

The Group community investment committee

The Group community investment committee (the committee) is chaired by Sir John Weston and its other members are Sir Robin Nicholson, Mr C H Green, Mr J M Guyette, Mr A Arendt, Chairman, Rolls-Royce Deutschland Ltd & Co KG, Mr A Fokkens, President – Commercial Marine, and Mr J R Rivers, Director – Human Resources. The committee is responsible for administering the Company’s policy on charitable donations worldwide. The policy pursued by the committee when considering charitable appeals is set out in the Report of the directors.

During the year the committee reviewed its operations and with the Board’s approval, adopted revised terms of reference and membership reflecting the establishment of a Group-wide policy. The committee is supported by a series of national committees dealing with national appeals which are considered within the policy established by the committee. The Board believes that the adoption of these changes will improve both the profile and coherence of the Group’s charitable activities.

Political donations

In line with its established policy, the Group made no political donations during 2003.

Communication with shareholders

The Company attaches importance to the effectiveness of its communications with shareholders. It publishes a concise Annual Review and Summary Financial Statement as well as a full Annual Report and there is a separate environmental report.

There is regular dialogue with individual institutional shareholders as well as general presentations after the preliminary and interim results. In October 2003, the Company held a major investor seminar at which the presidents of the business sectors and senior executives described the Group’s businesses and key strategic priorities. All shareholders can gain access to these and other presentations, as well as to the Annual Report and other information about the Group, through the Group’s website at www.rolls-royce.com. They may also attend the Company’s AGM at which the important business developments during the financial year are highlighted and at which they have an opportunity to ask questions.

The directors are informed on a regular basis of key shareholder issues, including share price performance, composition of the shareholder register, and City expectations. Independent research is commissioned annually into institutional shareholder perceptions of the Group.

The Chairman and Chief Executive ensure that the views of shareholders are regularly and comprehensively communicated to the Board. The Senior independent director and the non-executive directors are briefed on shareholders’ views and have the opportunity to meet with shareholders as appropriate.

All directors attend the Company’s AGM and the Chairmen of the audit, remuneration and nominations committees are available to answer any questions from shareholders on the work of their committees.

The Company confirms that it sends the AGM notice and relevant documentation to all shareholders at least 20 working days before the date of the AGM. For those shareholders who have elected to receive communications electronically, notice is given of the availability of documents on the Group’s website.

Internal controls and risk management

Directors’ responsibilities

The directors are responsible for the Group’s system of internal control and for maintaining and reviewing its effectiveness from both a financial and operational perspective. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and to provide reasonable but not absolute assurance against material misstatement or loss. The Group’s approach to internal control is based on the underlying principle of line management’s accountability for control and risk management.

In reviewing the effectiveness of the system of internal control, the Board has taken account of the results of all the work carried out to audit and review the activities of the Group.

There is an ongoing process to identify, assess and manage risk, including those risks affecting the Group’s reputation. This process is subject to continuous improvement and has been in place throughout the financial year to which these statements apply and up to the date of their approval.

The Board has reviewed the risk management process and confirms that it complies with the Turnbull Committee Guidance on Internal Control issued in September 1999.

The Board has a risk committee, chaired by the Chief Executive, with specific accountability for the system of risk management and for reporting key risks and their associated mitigating actions to the Board. Details of the membership of the committee are set out in the Report of the Directors.

Organisation

The Group has a clearly defined organisation structure within which operational management have detailed responsibilities and levels of authorisation, supported by written job descriptions and operating manuals.

Rolls-Royce also has a code of business conduct which lays down the principles to be followed by employees in the course of conducting business. The code also gives guidance to support achievement of the required standards. Additionally, a confidential reporting line has been introduced to enable UK employees to report, outside of the normal management chain, any concerns they may have with regard to business conduct.

Risk management system

The risk management system is an integral part of management’s approach to delivering business objectives and is a systematic process designed to identify, assess, treat, manage and communicate risks. It also provides a method of escalation and delegation to the appropriate level within the organisation and ensures actions are owned, defined, resourced and effective.

Management is responsible for the ongoing identification and evaluation of significant risks within their areas of responsibility and, using a common process, for the operation of suitable controls or mitigation actions. Risks may arise from a variety of internal and external sources. They may be associated with regulations, customer requirements, and competitor actions or could result from the capability of the processes used to execute the business or from external and largely unpredictable events such as terrorist activity or war. All risks, irrespective of source, are managed through processes operated by project and functional teams. Management reports regularly to the risk committee on its view of risks and how they are managed, so that the Board can then consider and review these risks in terms of their potential impact.

During 2003, the communication and understanding of risk have continued to be enhanced throughout the business, including the ongoing development of plans to address the risks identified in areas such as business continuity. Management has undertaken comprehensive risk reviews for all key projects, programmes and business change plans. All the processes operated by the Group are subject to continuous improvement activity.

Systems of internal control

The general managers of individual businesses are aware of their responsibility to operate systems of internal control which provide reasonable assurance of effective and efficient operations, reliable financial information and compliance with laws and regulations. Financial managers are required to acknowledge in writing that their routine financial reporting is based on reliable data and that their results are properly stated in accordance with Group requirements.

The Group has a comprehensive budgeting system with an annual budget approved by the Board. Revised forecasts for the year are reported at least quarterly. Actual results are reported monthly against budget and variances reviewed.

The activities of the Group are subject to review by the Department of Risk, including Business Assurance and Project Risk Assessment, and the assurance functions of Health, Safety and Environment, Quality and Engineering. These functions operate to work programmes agreed by the appropriate Board member.

The Business Assurance function, which works closely with the external auditors, undertakes a programme of financial and operational audits and reviews agreed by the audit committee and covering all Group activities. The programme includes independent reviews of the systems of internal control and risk management. Findings are reported to the audit committee four times a year and to the risk committee twice a year.