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Corporate Responsibility Report 2004

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CorporateResponsibilityReport on the web

More information about BAE Systems and CRcan be found on our website:www.baesystems.com/corporateresponsibility

We welcome your views. Email any comments [email protected]

ContentsMessage from the Chief Executive 1Objectives and progress 2Stakeholder engagement 4Corporate responsibility at BAE Systems 9Does the defence industry really benefit the economy? A debate 10Business ethics 12Workplace 14Education and community 18Supply chain 22Safety,health and environment 24Assurance 28CR on the web 30Feedback – tell us your views Inside cover

Front cover pictureThe AR327 Commander long-rangeland-based radar is manufactured in the UK. It is at the forefront of communication technology.Communication systems are a keypart of our business and we recognisethe value of communication in allthat we do. We do not claim to be at the forefront of communication in corporate responsibility but westrive for continuous improvementto equal the high standards of our products.

About BAE SystemsBAE Systems is an internationalcompany engaged in the development,delivery and support of advanceddefence and aerospace systems inthe air, on land,at sea and in space.The company designs,manufacturesand supports military aircraft,surfaceships,submarines, radar,avionics,communications,electronics andguided weapon systems. It is apioneer in technology with a heritagestretching back hundreds of years. It is at the forefront of innovation,working to develop the next generationof intelligent defence systems.

BAE Systems has major operationsacross five continents andcustomers in some 130 countries.The company has more than 90,000people and generates annual sales of approximately £12 billionthrough its wholly owned and jointventure operations.

About this reportThis report describes our corporateresponsibility (CR) performance in 2004.

The theme is debate. In previousyears we have asked contributors to give their views on issues arounddefence exports and CR in thedefence sector. This year we focuson the debate about our contributionto the economy.

We value the views of our stakeholdersand throughout the report we haveincluded perspectives and opinionson many of the key issues associatedwith our business.

The report covers all BAE Systems’wholly owned businesses. Data isfor calendar year 2004.

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1BAE SYSTEMS Corporate Responsibility Report 2004

Corporate responsibility (CR) in BAE Systems is about good business practice and continualimprovement. Our performance in 2004underlines this as we delivered significant valueacross our worldwide activities. We also achievedreductions in accidents across our operationsand our ongoing investment in training anddevelopment is contributing to deliveringimproved performance across our company.

Defence is a serious business and we recognise itis one that often provokes differing views. This iswhy we have chosen to focus on ‘debate’ as thisyear’s reporting theme. Debate means manythings. It’s not just about understanding theconcerns of others but also about communication,building relationships and challenging opinionsaround those issues that are fundamental to ourbusiness now and in the future. We consider it to beone of our responsibilities to help externalstakeholders understand the value of defence,bothin terms of national and global security and also asa sovereign capability and wealth generator in ourhome markets. We have engaged with BASIC

commissioned a third-party assurance group,csrnetwork, to carry out an independent review of accountability processes within our business.This review,coupled with ongoing stakeholderfeedback and our own commitment to progress,led to us expanding reporting in several keyareas. First,we have included more detailedinformation about who our main stakeholdersare and how we engage with them. Secondly,we have increased the amount of information on business ethics and our operating principlesand finally we have taken steps internally tostrengthen the way corporate responsibility ismanaged to ensure it is fully embedded into alllevels of our business.

To deliver products at the leading edge oftechnology in line with the needs of our customersrequires a high-performance culture. It is aspecific objective in 2005 for all employees todeliver high performance across all aspects ofour business. On this basis, I anticipate beingable to report continued progress on our CRagenda in future.

(British American Security Information Council),anindependent research organisation,on this issuepreviously and are pleased they accepted ourinvitation to debate it in this report.

Our CR agenda is based on potential risk to ourbusiness. When evaluating risk it is essentialthat we engage with stakeholders andunderstand their views and perception of ourbusiness and do not rely solely on our ownassessment. Accordingly,we invited recognisedopinion leaders on CR to provide their views onour progress to date. We are pleased that ourefforts and commitment are being recognisedand have taken on board their comments andviews on areas for improvement.

This year we have introduced formal reporting on CR issues to the Board of Directors and haveexpressed public commitment in our AnnualReport & Accounts to conformance with theAssociation of British Insurers (ABI) Guidelines.The Board has decided to establish a CRCommittee to be chaired by a non-executivedirector to provide focus on CR issues. We also

Mike Turner

Chief ExecutiveBAE Systems

“Defence is a serious business and we recognise it is one that oftenprovokes differing views. This is why we have focused on ‘debate’as this year’s reporting theme.”

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2 Objectives and progress

We regularly review and update our CR activities to ensure we make progress on key issues and establish objectives forthe coming year.

Conducted a worldwide employeesurvey covering a range of CRrelated questions,see page 6.

The survey showed positivefeedback on employeeengagement,and support andrespect in the workplace. It alsoidentified areas for improvementincluding management of poorperformance,business change and trust in leadership.

Action plans developed in eachBusiness Unit to respond to thesurvey findings.

Commissioned a survey of key CR opinion leaders to get feedbackon our CR performance andreporting,see page 8. Feedbackshowed we have made someprogress since 2002 butstakeholders still have concernsregarding our communication onethical issues and transparencywhich we have begun to address in this report.

Extended the ethics hotline to all ourAustralian sites.

Introduced an ethics email addressthat can be used by employeesworldwide.

42 calls were made to the ethicshotline in the UK and 574 in the US,see page 12.

Held our first Ethics OfficerConference in North America to share best practice.

Benchmarked our whistleblowingarrangements against the Instituteof Chartered Accountants Guidanceon Effective WhistleblowingArrangements.

Participated in the Economic Co-operation and Development(OECD) Phase 2 review to helpassess implementationof the OECDAnti-Bribery Convention in the UK.

Partnered with the UK Health andSafety Executive to develop a bestpractice approach to managing five key risks. These are confinedspace working,hand-arm vibrationsyndrome (HAVS),working at height,contractor management and slips,trips & falls.

Agreed a three-year audit programmeof our manufacturing sites todevelop and extend best practice inthe five key areas. In 2004,our sitesat Samlesbury and Barrow wereaudited as part of this programme.

Held our annual Safety,Health &Environment (SHE) conference in November 2004 to provide anetworking and learning opportunityfor safety professionals across our operations.

Improved our SHE performance in a number of areas,see data on page 24.

Conduct a worldwidesurvey of employeesto review progresson CR since 2002.

Extend our ethicshotline to operationsin Australia.

Partner with the UKHealth & SafetyExecutive toaddresskey areas of safetyperformance.

Began working with CSR Network(an independent consultancyspecialising in CR assurance) on an assurance process for our CRreporting,as a first step towards full verification. Their assessmentof our CR processes is provided onpage 28.

Reviewed our SHE data collectionsystems and commissioned a newdatabase which will improve thequality of SHE data.

Reporting framework for SHEperformance data formally agreed by the Executive Committee.

Assessment of SHE managementsystems across our CustomerSupport & Solutions (CS&S)operations carried out by ourinternal audit group.

Introduce an externalverificationprogramme forsafety andenvironment data.

Progress in 2004 – How did we do?

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Our objectives for 2005 are: 1 Establish a board committee on corporate responsibility2 Improve our rating against Accountability standard AA1000 3 Improve safety,health & environmental performance4 Develop a formal stakeholder engagement plan5 Upgrade our CR website to provide real-time information

on our CR activities

Objectives 2005

Established a Carbon Club for ourUK manufacturing sites and jointventure and partner companies inthe UK to address compliance withthe EU Emissions Trading Scheme.

Strategy for the reduction of carbonemissions developed by the Carbon Club.

The BAE Systems Board decided to disclose in our Annual Report our approach to managing corporateresponsibility risks in compliancewith the Association of BritishInsurers (ABI) Guidelines.

Appointed a new director forDiversity and Equal EmploymentOpportunities for our NorthAmerican businesses.

A diversity case identifying keyobjectives and actions across ouroperations was agreed with ourExecutive Committee,see page 14.

Gave £1.1million in charitabledonations.

Employees and the company raised£6 million for Charity Challenge andrecorded 5,700 volunteer days.

Undertook research with schoolsand partners to help us strengthenour education partnerships.

Completed certification to ISO 14001,the international environmentalmanagement standard,at all ourmajor manufacturing sites.

BAE Systems continued to beincluded on the Dow JonesSustainability Index.

Joined the UK Dignity at Work partnership to combatworkplace bullying.

Achieved Investors in Peopleaccreditation in our AvionicsSystems business.

Review energymanagement andestablish a strategyto improve energyefficiency and reduceconsumption.

Other highlights.

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4 Stakeholder engagement

Corporate responsibility is about how we dobusiness,so it involves everyone who works atBAE Systems. Here,several people from acrossthe company explain its relevance to their job.

Perspectives on Corporate responsibility

Engaging with our stakeholders

“BAE Systems goes beyond many othercompanies in the defence industry as it commits to responding to thespecific challenges of defence exporterswith respect to the nature of productsand its impact.” Dow Jones Sustainability Index assessment

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Defence companies play an important andlegitimate role in society. We are proud that ourproducts help countries to defend themselvesand enable peacekeepers to do their jobs.

However,we recognise that for some defence is a controversial industry. No matter how necessary,the manufacture and sale of equipment that isdesigned to kill inevitably evokes strong feelings.

We believe it is important to understand theviews of others and explain our approach. Goodcommunication helps us develop and improveour CR programmes.

We encourage dialogue and open communicationwith our stakeholders including employees andtheir families, trade unions,shareholders,customers,business partners,suppliers,competitors, governments,NGOs and localcommunities.

Much of this discussion takes place as part of normal business. We also communicatespecifically on our CR performance through thisreport, our website and individual meetings.

These are some examples of our interactionsduring 2004.

InvestorsWe meet regularly with investors, including thoserepresenting socially responsible investmentfunds (SRI) to discuss CR issues.

We met with over 30 SRI investors during 2004,in the UK,Benelux and France, to discuss a rangeof issues relating to our CR performance andreporting. Several SRI analysts also took part in our opinion leader survey.

BAE Systems is listed in the Dow JonesSustainability World Index and Dow Jones STOXXSustainability Index. Our inclusion in theseindices is based on an annual assessment by

Shelley Mearns

Corporate responsibility isabout taking an active role inthe community. It’s also aboutappropriate governance andethical behaviour.

The most important elementof CR for me is our charitywork. Most of our employeescome from the local areaand want to give somethingback. We encourageemployees to get involved in Charity Challenge. Thisallows people to balancetheir interests outside workwith their jobs.

BAE Systems has 50locations in Australia,oftenin remote areas. Our CRprogrammes aim to create a sense of communityacross the company.

Human ResourcesDirectorBAE Systems Australia

Sustainable Asset Management (SAM) Research.In 2004 this assessment rated BAE Systemsstrongly in several areas including our code ofconduct,and risk and crisis managementsystems. BAE Systems was also rated above theindustry average on environmental managementand among the best for human resourcesmanagement and community activities. Theassessment gave BAE Systems a strong scorefor its willingness to enter into dialogue withstakeholders on controversial issues. Areas that received lower scores include transparencyand strategic planning.

We participated in the Business in the CommunityCorporate Responsibility Index in 2004. Resultswill be available in 2005.

We also seek feedback from our shareholdersthrough our Annual General Meeting,a feedbackquestionnaire included in our Annual Report andvia our corporate responsibility email [email protected].

Mark Allen

Amicus (ProfessionalStaff) Secretary,Warton Unit Secretary ofBAE Systems Trade UnionDelegates Conference

Communications and Corporate AffairsManager,BAE SystemsAustralia

To my mind corporateresponsibility is mainly abouthow the business affects the people that work insideit. You have to get thingsright for them.

For the people I represent,the major issue is job security.This can be enhanced bytraining and by the companyhaving good CR policies thatwould hopefully help us to winmore government contracts.Other important issues arepensions, fair treatment in the workplace and safety at work. We havetrade union representativeswho deal specifically withhealth and safety issues.

Ed Langmaid

A sincere and vibrant‘corporate responsibility’culture positively influencesattitudes about our company.It ensures that employeesknow that the company caresabout the community andenvironment.

Employees get involved inlots of ways, from CharityChallenge to recycling ordonating items instead ofthrowing them into thetrash. Our ethics policies are communicated throughnewsletter articles, trainingand most of all by managerssetting a positive example.

Director of Public Affairsand Communications,US

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EmployeesRegular surveys are an important way foremployees to give confidential feedback. They help us to understand employee views,monitor progress and improve our performance.

We conducted our second global Employee OpinionSurvey in April 2004. All employees were invitedto participate and over 37,000 people (56% ofemployees) from across BAE Systems took part.

The survey tracked our progress against our first global survey in 2001 and our snapshotsurvey in 2002. It also compared our results with those from other major companies and ourpeers in the aerospace and electronics industry.

Many of the questions help us to review ourprogress on CR.

Areas that scored well include employeeengagement,and support and respect in theworkplace. For example,81% agreed with thestatement, ‘My immediate manager/team leader consistently treats me with fairness andrespect’; 71% agreed that BAE Systems createsa climate of mutual respect among employees of different backgrounds.

The most notable improvements since our survey in 2002 were in the areas of managementaction and feedback.

Some Business Units included additionalquestions on business ethics. These receivedhigh scores. For example, in our North Americanbusiness 93% of employees confirmed that theyunderstand BAE Systems’ rules of businessconduct and ethics.

The survey also identified areas for improvement,such as management of poor performance,business change and trust in leadership.

It is important that we act on the feedback given.Each Business Unit has assessed the surveyfindings and developed action plans to addressthe issues identified. Action Teams have beenappointed in each Business Unit to recommendimprovements.

Employee Opinion Survey : Improvements since 2002

49%

47%

56%

My immediate manager/team leader lets me know how I am doing on an ongoing basis.*

37%

43%

I believe my Business Unit will act on the results of the survey.*

Aerospace and electronics average 2004

45%

55%

My business unit leadership team is taking positive steps to improve business performance.

2004

2002

2004

2002

2004

2002

% of employees who agree

Notes * Comparable datafor the aerospace andelectronics industryare not available forthese two areas

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Andy Williams

CR is about being ‘a goodneighbour’. In my day-to-daywork health and safety,product safety and care forthe environment are crucial.

My goal is to create aforthright environmentwhere employees can raiseconcerns. We also employan independent consultancywhich employees can call for advice or help.

We have a high-profileinvolvement in thecommunity. This is not justabout charity. Our groundsmaintenance is done bythe Blendworth Centre,for adults with learningdifficulties. They do a superjob at a competitive price.It’s a real win-win.

Managing Director,Underwater Systems

Action plans have also been developed atcorporate level to address issues of relevanceacross the company. These include measures to increase confidence and trust in leadership by improving communication with employees. The survey results show different trends betweenmale and female employees at different levels of seniority. Specific actions are being planned by our diversity team and human resourcesdepartment to address this.

Progress will be communicated to employeesthrough regular business reviews,newslettersand via the company intranet.

SuppliersGood communication and two-way feedback areimportant elements of our supplier managementprogramme. We meet with key suppliers quarterlyto review progress against targets, get feedbackand identify ways we can better support them.See page 22.

CustomersWe seek feedback from our customers to help us better understand their requirements,identify new business opportunities and improvecustomer relationships.

Our customer relationship programme is knownas Customer Voice in the UK and CustomerPerception Survey in the US. It includes acustomer feedback mechanism and a companyreview process to ensure feedback is acted on.

Feedback is used by management in businessplanning to drive change throughout BAE Systems.Findings help us to understand the priorities ofour customers and to reshape our services andbehaviour to meet their needs.

Customers are invited to get involved in actionplanning. This enables us to work in partnershipwith them to identify and act on improvements.

Walid Abukhaled

CR is about what the companyputs into the community. BAE Systems has had asuccessful 30 years in SaudiArabia so it is good policy forus to give something back.

This means helping Saudisto become more self-sufficient and prosperous –by employing Saudi nationals,sharing technology andsupporting education andlocal charities.

As head of PR, CR isextremely important to myjob. I regularly talk to thepress and public about thegood things we're doing. As a foreign company thisis vital to maintaining public support.

Head of PR &Communications –Middle East

Heather Anderson

To me corporate responsibilitymeans that BAE Systems iscognisant of environmentaland social issues and is tryingto behave responsibly as abusiness. From a businessperspective CR helps toimprove public perceptionsand is popular with investors.

CR is relevant to my day-to-day work; my current jobinvolves a study into lead-free soldering,which hasenvironmental benefits.Health and safety and thetreatment of employees arealso important aspects of CR.

Project managementgraduate,Avionics,Edinburgh

“BAE Systems need to keep pursuing an open relationship and to encourage its people to be innovative in how they meet thecustomer’s requirements.” Mary O’Gorman,Director Strategy,Defence Logistics Organisation

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“You should engage positively and create a dialogue with critics as part of being transparent.” Trade union representative

CR opinion leadersIn 2004,we commissioned a small survey of 25 CR opinion leaders in the UK,Europe and the US. Participants included journalists,analysts, non-governmental organisations(NGOs), trade unions and industry representatives.Ten of these also participated in our first surveyin 2002.

The survey gives us qualitative feedback andprovides a snapshot of views. In general,participants welcomed our efforts to address CR issues and felt that CR is important to thedefence sector.

Survey findingsEthics and transparency were viewed as the mostsignificant areas for improvement. Participantswere keen to see more information on our policyregarding defence sales and some expressedconcern that we do not do enough to addressethical issues in this area.

Bribery and corruption continued to generatemost comment,with participants requiringfurther clarity on the steps we have taken toaddress these issues. Product stewardship andthe environment,particularly climate change,were also considered to be significant issues for our company.

We specifically sought views on the quality of ourprevious CR reports. Many participants felt thatour report should say more on how we complywith our policies and with the law. In particularthere was a desire to see clearer information on corporate governance, including lines ofresponsibility throughout the company and atexecutive and board level.

There was also a request for more information onour approach to defence sales and human rights.

Interviewees felt that future reports should havemore information on ethics with less emphasisgiven to community and charity work.

The report also received some positive feedback.In particular, participants felt that our objectivesand progress were clearly presented and likedthe inclusion of positive and negative feedbackfrom stakeholders outside the company.

We value this feedback and have endeavoured to address as many issues as possible in thisreport. We will continue our efforts to improvecommunication on these issues.

Local communitiesWe have good relations with the communitiesaround our sites and enjoy frequent and opencommunication with this stakeholder group.Our site managers address any complaints onissues such as noise or traffic congestion ifthey arise.

Many of our employees interact with their localcommunities through our community investmentand education programmes,see page 18.

Corporate responsibilitymeans being aware thatwhat we do affects theoutside world. In the MiddleEast our work for charities is the most visible aspect of CR. But CR is more thanwhat we do for charity – that is the easy bit. It’s alsoabout ethics, safety and the environment.

I would like us to be moreproactive on CR in our export markets and makeour work on ethics,safetyand environment morevisible. This shows thecountries where we workthat we’re not just interestedin selling to them,we’re alsoworking with them to benefitthe community.

Jayne Thomson

% of opinion leadersGoodSatisfactoryPoor

Opinion leader survey results 2002 and 2004

42% 33% 25%

50% 36%14%

How would you rate BAE Systems’ performance on CR?

50%21%

64%21%15%

How would you rate their commitment to improve?

60%20%

How would you rate BAE Systems’ current CR report?

2004

2002

2004

2002New question for 2004

2004

200229%

20%

Director of PR &Communications –Middle East

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Corporate responsibility (CR) is about goodbusiness practice and continuous improvement.It requires us to recognise and act on ourresponsibility to stakeholders. Everyone in the company has a role to play.

This section explains how we manage CR issues.

Managing corporate responsibility Overall responsibility for CR lies with the Board of Directors. It has delegated certain matters to a number of Board Committees.

The Remuneration Committee is responsible for agreeing the remuneration of the executivedirectors (including the Chief Executive).

The Audit Committee is responsible for reviewingthe output from the group-wide process used toidentify, evaluate and mitigate risk – including CR risks. It is also responsible for evaluating the performance of the external auditors andensuring the processes are in place to ensure

that their objectivity and independence is not compromised.

The Board has recently agreed to form aCorporate Responsibility Committee that will be responsible for reviewing and monitoring the processes the company uses to managesocial, environmental and ethical risk and toassist the Board in overseeing the development of strategy and policy in this area. It will bechaired by a non-executive director.

The Chief Executive is responsible for all normaloperational matters and has delegated specificresponsibilities to the Group Legal Director(Ethics,Compliance and Business Principles)and the Group HR Director (Workplace,Communityand Business Environment).

CR issues are managed day-to-day by our CR team. In 2004 we established a CR Forum,with representatives from each Business

Unit. This includes experts in communication,human resources,health and safety, communityaffairs, investor relations and the environment.

The Forum will meet regularly to coordinate CR activities and reporting,share best practiceand promote internal communication andawareness-raising on CR issues across thebusiness. Each Business Unit has developed a CR action plan reflecting its specific issues and stakeholder groups.

AssuranceIt is important that our CR reporting addressesissues that are material to our business and reflects stakeholder concerns. In 2004 we worked with an independent consultancy to benchmark our CR reporting against other major companies and best practicestandards, using the Accountability Rating,see page 28.

Corporate responsibility at BAE SYSTEMS

Management of corporate responsibility

Group Legal Director

Strategy and review AssuranceDelivery & performance

Group HR DirectorBusiness Unit/

SectorGroup Audit

BoardInternal Audit

External Audit

Board RemunerationCommittee

CorporateResponsibilityCommittee

Chief Executive Audit Committee

To be formed in 2005

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10 Debate: Does the defence industry really benefit the economy?

Does the defence industry reallybenefit the economy?

London,December 2004

BASIC characterises UK Governmentpurchasing from BAE Systems as a ‘subsidy’. Thisargument is misplaced.The UK operates the most openlycompetitive defence market. BAE Systems has to win on merit by demonstrating value for money.International comparisonsdemonstrate that BAE Systemsdelivers quality equipment at verycost-effective prices.

BASIC describes research anddevelopment (R&D) spending by the Government through BAE Systemsas a subsidy. This is incorrect.Customers usually pay for R&Dthrough pricing – in every sector fromautomotive to pharmaceuticals. Thedefence sector is different,becausethe customer (the Government)dictates in considerable detailspecific requirements,often under

“The facts indicatethat defenceexports benefit the economy andnational security.”

tight security rules. It is thereforemore effective for the customer topay for R&D direct. Buying ‘off theshelf’ sounds superficially attractivebut ignores the sensitive uses towhich defence equipment is put.The nation needs control of thetechnology to ensure thatequipment can be upgraded andmodified to meet UK requirements,often at very short notice,and canbe supported throughout its 30-yearplus life.

It is naive to think that without thepressure of home-grown competition,the UK customer would not end uppaying for R&D on supposedly offthe shelf equipment bought fromoverseas. The only effect of suchpurchasing would be to kill off one of the UK’s few remaining centres of engineering and manufacturingexcellence. In some cases it wouldmean buying off the shelf from amonopoly overseas provider atincreased cost.

R&D spend also creates othersignificant economic benefits – new technologies,processes andskills typically spill over into thewhole sector (eg as it is replicatedby competitors), into other sectorsand eventually throughout the wholeUK economy.

The British Government’s view isthat the UK benefits from properlyapproved and targeted defenceexports. Academic research alsosuggests a strong causal relationshipbetween exports and economicbenefits such as productivity, higheremployment and sales. Increased

throughput in the British defenceindustry provides a pricing benefit to the Government and there arebenefits from longer production runs and commonality of equipmentwith allies.

An Oxford Economic Forecasting(OEF) study, commissioned byDefence Industries Council,indicates that the cost to Governmentof supporting defence exportsamounts to some £140 million at most (and some of this isattributable to broader defencediplomacy objectives,so wouldcontinue anyway). But the UKGovernment benefits from moreefficiently priced defence equipmentby £300 million a year. BASIC,and other NGOs,disagree inprinciple with defence exports.However the facts indicate thatdefence exports benefit theeconomy and national security.

BASIC argues that the economywould benefit if the resourcesapplied to defence were invested in other industrial sectors. Howeverthe Government has to continue to spend money on equipping thearmed forces in the interests ofnational security. As long as the UKdefence industry continues to makegood value,high-quality products theeconomy will benefit if this money isspent on equipment from the UKrather than off-the-shelf productsfrom other countries.

Julian Scopes

Head of UK Government Affairs,BAE Systems

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“Industriesshould standon their owntwo feet …subsidiesdistort efficientallocation ofresources.”

and use of military personnel,cheap export credits and theinfluence of exports on Ministry of Defence (MoD) procurement.

There is also the significantgovernment spend on military R&D.Since the 1980s transformation of the coal industry,mainstreameconomists have believed thatindustries generally should stand on their own two feet and thatsubsidies distort efficient allocationof resources. There are,of course,exceptions to this (such as correctionfor externalities, reallocation ofwealth,public services),butemployment and exports are notacceptable rationales underprevailing economic theory.

In any case,arms exports hardlyamount to an essential element ofthe UK economy. We are now talkingof little more than 60,000 jobs,0.2% of the national labour forceand fewer than the number findingnew jobs in the average month.Even MoD economists agree thatreduced arms exports would createmore jobs elsewhere in the economy.

BAE Systems’ turnover is around a quarter of one per cent of the UK’s total. The tax generated by BAE Systems reported in the OxfordEconomic Forecasting study wasmade up of employee’s income taxand NI contributions,as the companymade a loss in 2002.

But what of BAE Systems’ contributionto reducing MoD spend? The MoDclaims that exports save theirprocurement budget £350 million ayear. But how the department cameto this figure and how these savingsare actually made remains a mystery.These savings would not exist ifMoD stuck by its Defence IndustrialPolicy and placed value for money(in the broadest sense) over thelifecycle of equipment as its primeobjective. If it did, then it would buymore off the shelf.

Put simply, there is no doubt thatBAE Systems makes contributionsto the economy. But are thosecontributions more significant thanthose that would be made were theresources (skilled and unskilledworkers and capital) appliedelsewhere in the economy? The jury is still out,but the challenge isstrong. This must call into doubt thebasis upon which the governmentprovides the company with suchgenerous financial support.

London,December 2004

Claims that armsproduction in general,and BAE Systems inparticular,presents aspecial contribution to the UK economydeserving of publicsupport need particular scrutiny.Publishing a report (the OxfordEconomic Forecasting study) thatsimply outlines the level of exports,investment, employment andcontribution to the exchequer does not in itself settle the matter.

We can debate the level of taxpayers’money received by BAE Systems tofacilitate its exports (we believe it tobe hundreds of millions of pounds),but there can be no doubt that thereis a significant subsidy from DefenceExport Services Organisationsupport,contacts with (or promotionby) military attachés,official visits

In 2003,we commissioned a report by Oxford Economic Forecasting (OEF) to measure thecontribution that BAE Systems makes to the UK economy. Here we debate with the BritishAmerican Security Information Council, an independent research organisation, thesignificance of the study’s findings.

Paul Ingram EmmaMayhew

Senior Analyst,BritishAmerican SecurityInformation Council

Project Analyst,BritishAmerican SecurityInformation Council

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12 Business ethics and operating principles

The nature of our business means it is particularly important that we have strong values and anawareness of public concerns.

BAE Systems is committed tocomply with all laws governingdefence sales and to meeting thehighest ethical standards in ourdealings with others.

We would never condone unethicalor illegal conduct. It is not onlywrong, it could also damage thenational interests of the countrieswhere we operate,harm thecommercial prospects of thecompany and leave employees anddirectors liable to imprisonment.

Our Operational Framework sets outour policies and governancesystems to ensure that allemployees carry out our business inan ethical way. The Framework isreviewed and updated annually.

Ethical conductWe are committed to conduct ourbusiness to the highest ethicalstandards. We comply with the law in all countries where we operate,including laws implementing theOECD Anti-Bribery Convention andthe US Foreign Corrupt Practices Act.

All BAE Systems’ employees arerequired to act with honesty, integrityand fairness. We will not toleratebribery or other attempts toimproperly influence the decisionsof customers or suppliers.

Our Operational Framework sets out our expectations of employees.It is supported by more detailedpolicies to guide employees in theirwork. These cover a range of issues including ethical conduct,appointment and monitoring ofmarketing consultants andadvisers,offset agreements,conflicts of interest and appropriategifts and corporate hospitality.

In the US all new employees are required to complete fourmandatory online ethics trainingmodules and all employees arerequired to view an ethics trainingvideo annually.

Monitoring and complianceEmployees are encouraged to seekadvice on any concerns and arerequired to report suspected casesof unethical conduct.

They can do this through their linemanager or confidentially throughour independently managed ethicshotline. This toll-free telephone line is available in the UK and US and was launched in ouroperations in Australia in January2005. Arrangements are in hand to provide local free telephonenumbers in other countries in which we operate. We also have an ethics hotline email address that can be used by all ouremployees worldwide.

As well as support from their linemanager,employees in Saudi Arabiacan contact the managing directorof our Saudi operations directly via a confidential post box with anyconcerns. We plan to extend thetelephone hotline to our employeesin Saudi Arabia during 2005.

In 2004 the UK hotline andworldwide e-mail address received a total of 42 enquiries. Of these 26 calls related to human resourcesissues,11 were requests for furtherguidance or clarification,2 werecases of suspected fraud and 3were concerning our legal/environmental policies.

More transparency from thecompany about our operatingprinciples should help stakeholdersunderstand the responsible naturein which we conduct our business.We are committed to providing this transparency.

Training and awarenessWe have training and awarenessprogrammes to ensure thatemployees understand our policiesand the standards of conductexpected of them.

Our booklet Ethics and You explainsin summary form our stance onethical issues affecting ourbusiness and introduces our ethicshotline. It has been distributed to all employees in the UK,SouthAfrica and Australia and a version is being prepared for use in SaudiArabia. It is also available on ourintranet site. Our US business has a similar booklet entitled Code of Ethics and Standards of Conduct which contains, inaddition, material reflectingparticular aspects of US law andpractice relevant to doing businesswith the US government.

We provide awareness training on our anti-bribery programme tomanagement and supervisory staffaccording to their business role. We have trained staff fromcommercial, procurement, finance,customer support and otherfunctions, in addition to marketingstaff and senior managers generally.On completing the training of thesession employees are asked tosign a personal confirmation theyhave attended the course,and will comply with our policies and willreport any issues of concern.Employees involved directly in sales and marketing must attendthis training and must re-certify their compliance annually.

Business ethics and operating principles

In the US there were 574 contactswith ethics officers through thehotline,by mail, email and visits to the ethics office. These included248 requests for guidance andclarification,and 326 allegations

of misconduct in the workplace. The number of contacts in the US increased significantly this year. This is because of an increasein the size of our North Americanbusiness, improvements in datacollection and greater awareness of ethical issues.

We will be reviewing awareness of ethical issues across our UKbusinesses, including awareness of the UK hotline,during 2005.

Our UK Ethics Review Committee of senior executives reviews all calls to the UK hotline quarterly to ensure that reports areinvestigated and appropriate actiontaken. The Audit Director chairs the Committee and its members are the Director of CorporateResponsibility, the Director ofEmployee Relations, the Director of International Compliance and the Director of Security.

In North America,our ethicsprogrammes are run by an EthicsSteering Committee withrepresentatives from each BusinessUnit, and an Executive EthicsOversight Committee,of seniorexecutives chaired by the Senior Vice President Legal and GeneralCounsel. We have an Ethics Officer in each North American BusinessUnit who is responsible forinvestigating any allegations ofunethical conduct. We held our

“Demonstrate compliance with your policies.Show how you are working with unions andgovernments to ensure you act ethically.” Investor

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to be undertaken early in 2005 and the results reported to the Audit Committee.

BAE Systems is committed tocontribute to the debate on anti-corruption measures. We were one of the companies to participate in the industrialinterviews held as part of the UK’s OECD Phase 2 review in July 2004 which assessed how effectively the UK had implemented the OECD anti-bribery convention. In the UK we participate in theConfederation of British Industry(CBI) and ICC (UK) anti-briberyforums and regularly attendseminars on these issues. We also maintain contact with other major companies,which face the same challenges, to share learning. In North AmericaBAE Systems is a signatory to the Defense Industry Initiative on Ethics and Business Conduct(DII). Members of this industryorganisation agree to six principlesof ethical conduct and to share bestpractice. We report annually to theDII on compliance with its standardsfor ethical conduct and publicaccountability. BAE Systems NorthAmerica is also a sponsoringpartner in the Ethics OfficersAssociation.

FraudOur fraud prevention policy is stated in the OperationalFramework and our Internal Audit function is responsible for investigating all suspectedcases of fraud in the company. A formal fraud response plan has been developed.

The plan requires our Internal Audit department to investigate allallegations of fraud and outlines the procedure by which this should

be done, including setting up Fraud Investigation Boards wherenecessary. Fraud prevention anddetection information is madeavailable to all employees on adedicated intranet site.

Statutory controls on defence exportsThe sale of defence equipment is highly regulated. In the UK theExport Control Act requires us toobtain a licence for all defencesales. Licences will not be grantedfor countries where sales would beinconsistent with respect for humanrights or regional stability, or wherethere are UN arms embargoes ortrade sanctions in place.

In the US we are subject to regulatory controls including the Arms Export Control Act, theExport Administration Act andTreasury embargoes.

Michael Lester,our Group LegalDirector, is the board memberresponsible for ensuring that wecomply with export controls and the UK Government’s Code ofPractice. Twice a year the managingdirector from each Business Unitreports on compliance with exportregulations to the Audit Committeeand the Board.

We maintain an active and opendialogue with relevant governmentdepartments to help us comply withexport policies.

Offset agreements An offset is a requirement on acontractor to provide industrial,economic or other benefits to a country or government ascompensation for the purchase of foreign defence equipment orservices. This provision of benefitsmay take many forms. Theseinclude:

Direct Offsets:Platform/Product related Indirect Offsets:Defence,but not platform/product related Unrelated Offsets:Non-defence related.

Offsets,or industrial participationagreements,are a customer-drivenrequirement. Currently over 120countries operate offset regulations.Consequently bids directly togovernments,and to primarycontractors bidding for governmentcontracts, increasingly require theinclusion of offset proposals.

We apply the same rigorous controls and assurance systems to development and delivery of our offset obligations as we do to all other areas of our operation. This is specifically included withinour Operational Framework andAssurance process.

Political engagementIt is our policy not to make anypolitical donations.

We lobby governments to ensurethey are well informed about BAE Systems,our products andservices,and our economic andsocial contribution,when takingdecisions and formulating policiesthat affect our business.

Often lobbying is undertakenindirectly through trade organisations.In the UK these include the CBI andthe Society of British AerospaceCompanies. We also engage directlywith governments as part of ourmarketing activities.

Our Corporate ConsultativeCommittee of senior trade unionrepresentatives and managers fromour wholly owned UK businesseshave developed a joint process forlobbying government on job security.

first North American Ethics OfficerConference in 2004 for officers tomeet,share best practice,hear from external experts,and attend a one-day training programme onconducting internal investigations.

Improving our ethics programmesOur compliance policies andprocesses have been reviewed by legal experts in the UK and US to ensure they accord fully with the relevant laws. They are also inaccordance with the anti-corruptionrules of the International Chamberof Commerce (ICC) and are alignedwith Transparency International’sBusiness Principles for CounteringBribery. In early 2003,a review wascompleted by our Internal Auditteam to ensure that they were beingimplemented properly within thebusiness and some additionalguidance was provided followingtheir recommendations. A furtherreview in late 2004 highlighted a small number of furtherimprovements in specific areas,which have been implemented.

Also in 2004 we carried out a review of our whistleblowingarrangements and benchmarkedour policies against the Institute ofChartered Accountants in Englandand Wales (ICAEW) Guidance onEffective WhistleblowingArrangements.

The review found that ourarrangements compare well with the ICAEW recommendations butthat we need to do more to raiseemployee awareness. An indicatorof this need may be that the numberof calls to our ethics hotline is lowcompared with other companies of our size. We are looking at ways to increase awareness of the hotline among employees and to promote its use. A review ofawareness programmes is due

“Honesty and transparency are key issues. The money used to buyproducts comes from taxpayers so there is a duty of accountabilityto them.” Journalist

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14 Workplace

Workplace

We seek to:Create an environment of respect and trust wherein eachemployee is valued as an individual.Operate fair and transparent recruitment and resourcingpolicies that are based solely on merit and actively encouragecareer development within the organisation.Ensure that our reward framework is fair and aligns theinterests of employees with those of the business and theshareholders and facilitates a ‘high-performance’ culture.Actively seek and act upon employees’ views and feedback,using surveys, focus groups and any other appropriate meansof promoting communication and dialogue.Conduct regular dialogue on performance and development so that all employees have an opportunity for constructivefeedback with their manager about their performance, theirroles and responsibilities and development needs.

Create an environment in which employee relations,both individually and collectively,are managed in a spirit of openness and trust.Provide employees with timely business informationparticularly at times of organisational change to ensureadequate employee consultation, involvement and support.Ensure employees know what is expected of them and thatthey have the capability, resources and support to enable themto meet the demands of their job and deliver the performancerequired by the company.Provide learning and development opportunities to ensurethat people have the professional and personal skills toachieve their potential.

Our People Policy

“Everyone agrees that people are an organisation’s greatest asset,and we all know that for an organisation to succeed everyone hasto perform well.” Investors in People

Data : Diversity

Diversity data: EthnicityUK US

2003 2004 2003 2004White 36,296* 36,560 19,162(82%) 20,470(82%)Non-white 383 (1%)* 412 (1%) 4,207 (18%) 9,522 (18%)

Ethnic minorities in the US2003 2004

Total employees 23,369 24,992Ethnic minorities 4,207 (18%) 9,522 (38%)

Caucasian 19,162 (82%) 20,470 (82%)African American 1,636 (7%) 1,928 (7.7%)Hispanic 935 (4%) 939 (3.7%)Asian 1,402 (6%) 1,537 (6.1%)American Indian 234 (1%) 118 (0.47%)

Notes * Data for 2003corrected afterimprovements in our data collectionsystem

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Diversity data: GenderUK US Australia

2003 2004 2003 2004 2003 2004Total employees 36,679 36,974 23,369 24,992 2,658 2566Male 31,668 (86%) 31,953 (86.5%) 16,739 (72%) 17,731 (71%) 2,215 (83%) 2,132 (83%)Female 5,011 (14%) 5,021 (13.5%) 6,630 (28%) 7,261 (29%) 443 (17%) 433 (17%)Undeclared 0 0 0 0 0 1

We employ over 90,0001 people across fivecontinents. Most of our employees are based in the UK,US,Saudi Arabia and Australia.

To achieve our business objectives we depend on the skills, innovation and contribution of allour employees. We aim to get the best from ouremployees by treating them with respect,creatinga supportive work environment,and providingopportunities for training and development.

We are working with trade unions and employeerepresentatives to review continuallyemployment practices.

In 2004 we introduced a new People Policy,see page 14, to define our principles for peoplemanagement across BAE Systems. The policyis addressed to all employees but is particularlyimportant for managers and human resourcesprofessionals. The policy will be incorporatedinto our Operational Framework during 2005.

Diversity BAE Systems is committed to equality ofopportunity for all employees and to creating aworkplace where everyone is treated with respect.

We collect data on gender diversity in Australia,the UK and US,and on ethnic diversity in the USand UK to monitor our progress.

diversity and are developing action plans torespond to the findings. We also appointed a new Director for Diversity and Equal EmploymentOpportunities for our North American businessesand reviewed and updated our UK Respect atWork policy and procedures.

Dignity at Work

In 2004 BAE Systems was invited to become a founding member of Dignity at Work,a newanti-bullying partnership between the UKGovernment,Amicus (the UK’s largest privatesector trade union) and several majorcompanies. Workplace bullying is a seriousproblem that can affect employee health and performance.

Dignity at Work is researching the causes of bullying and developing guidance to helpcompanies tackle this problem. The partnership is still in its early stages but is expected toinclude training for human resourcesprofessionals on how to deal with bullying,awareness programmes and employeeharassment counsellors to help employees who are victims of bullying.

1 includes share of joint ventures


A diverse mixture of cultures,backgrounds and thoughts helps to drive innovation andperformance. Our Corporate Diversity SteeringGroup is working with diversity co-ordinators inour Business Units to help us recruit and retain a diverse workforce. This is a challenge in ourtraditionally white male-dominated sector.

In 2004 the Executive Committee agreed a newdiversity case for the business. This outlines amore proactive approach to diversity on the partof our senior leadership. It aims to ensure wemaintain a competitive business advantage byattracting and retaining a disproportionate shareof the world’s most talented people. The diversitycase includes specific actions to help us:- Demonstrate equality of opportunity and

prevent direct or indirect discrimination- Drive diversity and inclusion through selection

and development processes- Ensure we create a culture that attracts and

retains the best- Leverage maximum advantage from our

geographical footprint- Integrate diversity and inclusion into our

existing business practices.

During 2004 several Business Units carried outemployee surveys to assess perceptions on

UK employee type by gender 2004*Male Femaie Total

Executive 4,854 (90.5%) 508 (9.5%) 5,362Manual 8,698 (94%) 552 (6%) 9,250Professional 17,260 (82%) 3,805 (18%) 21,065Undisclosed 1,141 156 1,297Total 31,953 5,021 36,974

The North America Functional LeadershipDevelopment Programme (NA-FLDP) isan initiative based on building leadershipstrength,sustaining competitiveadvantage and leveraging resourcesacross the North America organisation.

During 2004 a North America-wide teamcompleted an internal and externalbenchmark study to assess currentgraduate level leadership developmentprogrammes in BAE Systems NorthAmerica. Results indicated the North America business would benefitfrom a consistent approach to identifying

and developing talent through expandedfunctional leadership developmentprogrammes. This will significantlyimprove our ability to recruit, develop and retain an increased number of highpotential employees. This will help tomitigate the pending shortage of skilledleaders and expand the pipeline of futureleaders for BAE Systems North America.

During 2005,a Functional LeadershipDevelopment Programme Best PracticeModel will be established. It will be basedon industry best practices and sponsoredby Vice Presidents who will communicate

and sponsor the model within theirspecific area. By implementing FunctionalLeadership Development Programmes,BAE Systems North America will have aconsistent approach to the developmentof new talent, improve the ability totransfer high potential employees acrossthe organisation,significantly improvesuccession planning within the functionalareas,and prepare future leaders toassume leadership roles.

North AmericaFunctionalLeadershipDevelopmentProgramme

Age (percentage)UK US Australia

2003 2004 2003 2004 2003 2004Under 25 10 9.3% 5 3% 26.2 8.8%26-35 19.3 18.6% 16 13.4% 43.8 25%36-49 45.6 45.6% 45 48.6% 18.5 43.3%50-59 21.9 23.1% 25 25.2% 3.2 19.1%60+ 2.9 3.5% 9 9.8% 8.3 3.8%

Notes * Transfer fromindividual businessunit legacy systemsto a common peoplereporting systemallows us to collectand report this datafrom 2004

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Training and developmentTraining helps our people develop their skills andcapabilities. It enables us to keep pace withchanging technologies and continue to improveour customer service.

In 2004 employees in our UK businessescompleted 122,658 training days (around threedays per employee). Training was focused onareas of particular need such as retraining foremployees at risk of redundancy (see case study,page 17).

We have a range of global training programmes tocater for employees at all levels of the business.These include:- E-learning courses. Employees can access over

550 e-learning courses from their desktop,at home or in our Learning Resource Centres.During 2004,around 28,000 courses weretaken,covering subjects from IT to presentationskills and managing budgets.

- Future talent development. Our apprentice andgraduate training programmes offer practical on-the-job training, coaching and mentoring.

which participants receive feedback from peers,managers and team members. Nearly 3,500employees participated in BPF in 2004,93% of those eligible.

- Virtual university. BAE Systems’ VirtualUniversity allows employees to access 3,000courses covering leadership,professionalcompetencies and personal effectiveness.Many of these are developed and run inpartnership with colleges and universities and can be identified through the IntegratedDevelopment Portfolio, see below.

The 2004 employee opinion survey soughtfeedback on training at BAE Systems. It showedthat 56% of employees feel they have access to the training they need to be productive in their current position. We are introducing anIntegrated Development Portfolio (IDP) toimprove awareness and take-up of training anddevelopment opportunities. IDP is an onlinelibrary of training modules,available via theintranet. The IDP will include details of trainingprogrammes and opportunities for placements,coaching and mentoring.

BAE Systems currently employs 1,100apprentices,of whom 300 joined the companyduring 2004. All our UK graduate recruitscomplete our two-year development programme.Around 180 were recruited in 2004.

- Professional development. Our Developing You training programmes cover engineering,project management,quality,manufacturing,procurement,business winning, finance andhuman resources. Hundreds of employees take part in these courses each year. Forexample, in 2004 398 employees took part in our Manufacturing Developing You coursesand 91 were enrolled on ProcurementDeveloping You. During the year employees in Australia,North America, the UK and SaudiArabia completed 7,500 training days on ourProject Management Developing Youprogramme (compared with 3,300 in 2003).

- Leadership development. Senior employeesdevelop their leadership skills through thePerformance Centred Leadership developmentframework. This includes a new BehaviouralPerformance Feedback (BPF) tool, through

16 Workplace

I am in my second year of a technicalapprenticeship to become adraughtsman. I applied for theapprenticeship to gain morequalifications, learn a trade and earn money at the same time.

In the first year of the apprenticeship I was based full time at college,studyingmaths,electrical fundamentals andtechnical drawing by hand and on thecomputer. So far in my second year I havebeen working on the shop floor to gainhands-on experience. Some of the skillswe’ve covered are reading working

drawings and learning to operate differentkinds of machinery and tools such asbuffs, grinders and welding torches.

There is a training officer we can talk to for advice or to discuss any issues.

Through the apprenticeship I have gainedqualifications,new skills and new friends.Once I finish, I hope BAE Systems willsponsor me to attend university toexpand on the skills I have learned.

Ian Madeley

Technical Apprentice,Naval Ships,UK

Perspectives on diversity Diversity refers both to thecharacteristics of our people(from gender and ethnicity tobackground and experiences)and to the internal culture of our company. We try tomaintain an inclusive culturewhere each individual’scontribution is valued.

The US is a multiculturalcountry. Our customers,particularly the US military,are becoming increasinglydiverse. We need to mirrorthat diversity to partner withthem effectively. There isalso a severe competitionfor qualified people in ourindustry so we need toactively seek candidatesfrom all communities.

As a US governmentcontractor, we comply with a variety of laws andregulations which requirenot only non-discriminationbut also effective outreach.These require us to takeaction to match the

demographic of ourworkforce to that of theareas from which we hire.Each of our various sites has its own AffirmativeAction Plan with annualtargets. Our approach is to be co-ordinated but with a strong emphasis on local efforts.

In our recruitment processeswe target schools with highpercentages of minoritiesand women graduates. Werun Women in Technologyprogrammes and are pilotinga minority scholarship atone of our sites. We alsofocus on hiring anddeveloping a diverseleadership population.

We have recently created a new position,Director of Equal EmploymentOpportunity and Diversity,North America, to lead ourdiversity efforts and help us develop our long-termstrategy in this area.

Curtis L Gray

Senior Vice President,Human Resources,BAE Systems North America

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The Avionic Systems and Platform Solutionsbusinesses have been awarded the Investors in People accreditation. This quality standardrecognises companies that invest in training and development of their people.

Industrial relationsA constructive relationship with the trade unionsthat represent our employees is key to managingchange. Good industrial relations are strategicallyimportant, helping us to remain productive,motivated and competitive. We partner with tradeunions to develop our employment policies andcompete for new contracts.

In the UK the Chief Executive meets with senior union representatives from across the UK business twice a year. We also hold quarterlyCorporate Consultative Committee meetings for union representatives to meet with seniormanagers. In 2004, topics discussed at thesemeetings included company strategy, investorfeedback, the employee opinion survey andgovernment relations.

increased contributions. We continue to consultwith trade unions,pension representatives and employees in relation to two of our otherpension schemes that have recently announceda funding shortfall.

Chairman’s Awards for InnovationOur Chairman’s Awards for Innovation recogniseemployees and teams who have found new waysto make BAE Systems a more innovative company,and helped us to live up to our values and benefitthe community.

Over 3,000 nominations were received in 2004and awards were given in two categories –innovation and implementation. Winnersincluded a ‘smart imaging’ targeting tooldeveloped by our engineers in San Diego,California. This significantly reduces the timeneeded to generate highly accurate co-ordinatesfrom imagery.

Redundancies We continue to both grow and restructure ourbusiness and during 2004 took on over 6,400new employees across our world-wide sites.Unfortunately restructuring also led to theannouncement of 1,519 job losses in the UK and 321 in North America and 19 in Saudi Arabia.

We work with trade unions in the UK to minimiseinvoluntary job losses. In 2004,60% ofemployees who lost their jobs left the company or changed jobs voluntarily through voluntaryredundancy,retraining, re-deployment elsewhereat BAE Systems or early retirement.

PensionsIn common with many other companies,we arefacing shortfalls in our pension funds due tolower than expected investment returns andincreased life expectancy.

The changes to our main UK pension schemeannounced in 2003 have been fully implementedwith both the company and employees paying

As technology develops and customerneeds change we inevitably requiredifferent skills from our workforce. This creates new opportunities in someareas but means other jobs will be lost.

Air Systems has developed a strategy to anticipate the future needs of thebusiness and prepare employees for thischallenge. Retraining for employees at riskof redundancy is an important element.

Debbie Sallis,HR Director for Air Systems,explains: “It is crucial that we addresswhat that means now and define the

steps that will have to be taken to reducethe impact on employees.”

To do this the company carried out areview of its existing training programmes,looking in detail at their effectiveness.Training resources were then reallocatedfrom non-essential areas to focus onimportant skills training and the New Startretraining programme. A ManagementDevelopment Programme has also beenintroduced to help managers recogniseand implement the most appropriate training solutions. The trade unions were

kept involved and informed throughoutthis process.

Results are starting to show. BarrieMason-Lister is one of 70 employees at Air Systems’ Warton site enrolled on the New Start training programme. A fitterat Air Systems for 16 years,Barrie is nowretraining to be a qualified electrician.“Not only has it given me the chance to do something I’ve always wanted to do,now I have a future to look forward to with the company.”

Retraining at Air Systems,UK


A mixture of people fromdifferent backgrounds helps to generate new ideas. That’s why diversity is important for a companylike ours which relies oninnovation.

In Australia the culturalenvironment is very relaxedand the country prides itselfon multiculturalism andacceptance of diversity. The Government does nottake a prescriptive approachto diversity. However we are required to produce an

annual report to theAustralian Government on equal opportunities and gender diversity in our workforce.

We have initiatives in placeto encourage more womento become engineers. This is helping to increasethe number of women at BAE Systems but we stillhave a long way to go,particularly at senior levelsof the organisation. This is the same for manycompanies in Australia.

Wayne Achurch Dee Blackmore

“The management of diversityseeks to fully develop thepotential of each employeeand turn their unique skillsinto a business advantage.”This quotation by Peter Herriot,the Occupational Psychologist,sums up the importance ofdiversity in business.

In delivering our strategy we are increasingly workingmore closely with ourcustomers to enhance theirmilitary capability. Diversitynot only brings creativity andchallenge to the solutionswe offer to our customers,it is also critical for the futuresustainability of our business.Current demographic trendshighlight the need to attracta more diverse pool of futureemployees. Statistics suchas ‘by the year 2010 only20% of the labour marketwill be white,non-disabledmen under the age of 45’(Institute of EmploymentStudies) clearly makes thepoint. Diversity can often

be seen as a soft issue,butit is not. It is fundamentallyabout business advantageand sustainability.

Within CS&S and LandSystems,each of theBusiness Units has anominated lead who isdeveloping local plans toaddress diversity.

Diversity is a key element ofour corporate responsibilityactivities, which ischampioned within the CS&S business by KevinTaylor, Managing Director,CS&S MASS.

During 2005 we aim to raiseawareness further throughtrade union consultativeforums and regular in-housenewsletters. We are alsoinvestigating the value ofpursuing externalaccreditation,such as Framework for Excellence in Equality and Diversity(FEED), to give visibility andpace to our diversity activities.

Human Resources Director,BAE Systems Australia

Head of HumanResources,CS&S andLand Systems GroupOffice,UK

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We donate money, time and expertise topromote science and engineering education and to support charities and good causes. This community investment is not just a goodthing to do – it is a core issue for our business.

Education

The number of students enrolled in engineeringand technology courses around the world hasfallen considerably in recent years. This hasserious implications for our industry and ourability to recruit and retain the best people. As a leading science and technology company,we need to ensure that talented young peoplecontinue to pursue careers in engineering andwe are in a good position to achieve this. Our keygovernment customers across the globe wantbusiness to be an active partner in improvingeducation.

Our education partnerships are a key element of our community investment. We partner withschools, colleges and universities to interestyoung people in engineering and technology,improve teaching in these areas and ensure thatyoung people have the skills our business needs.

18 Education and community

UKIn 2004 we invested £213,000 directly on oureducation partnerships in the UK. We also makea contribution indirectly through our expenditureon apprenticeships and university research(worth £26 million in 2004). The money wespend in these areas enables colleges anduniversities to develop their capabilities andimprove their facilities, raising standards andimproving engineering education.

Our education programme has two maincomponents:

1. In-school activityWe support engineering education in schoolsclose to our main sites. In total over 1,500 schoolshave joined our Schools Network. This gives themaccess to specially developed teaching materialsand opportunities to work with our people.

2. Online resourcesOur website www.baesystems.com/educationprovides schools with a wealth of resourcesabout engineering, to support teaching andprovide guidance on engineering careers. Theseare supported by the work of our Ambassadors,over 400 BAE Systems employees who visit localschools to help with engineering projects and

give careers advice. As well as giving children an insight into engineering, the Ambassadorprogramme helps our employees build theircommunication, coaching and projectmanagement skills and confidence. BAE Systemsallows Ambassadors up to three days a year offwork for these activities.

Our Ambassadors and employees also provide workexperience placements for young people. Over160 young people completed work experienceplacements during 2004,giving them a uniqueinsight into engineering in the workplace.

The company has strategic partnerships with 20 colleges and universities, to build engineeringresearch capabilities and improve ourundergraduate recruitment. BAE Systems haspartnered with the East Midlands DevelopmentAgency (EMDA) and Loughborough University to set up the Systems Engineering InnovationCentre (SEIC),a national centre for systemsengineering research, training and education.SEIC was formally opened by Lord Sainsbury in July 2004. The company is also the largestemployer of engineering apprentices in the UK,see page 16.

Education and community

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“The high school students have really gained from the experience of solving challenges and working as teams with a real engineer.”Teacher,Robert Smyth School,Harborough,commenting on the help received from BAE Systems

Saudi ArabiaChevening ScholarshipsBAE Systems supports the CheveningScholarships, run by the British Council to giveyoung people the opportunity to study in the UK and return with skills that will contribute tothe development of their home country. Twostudents are currently being sponsored directlyby BAE Systems to complete scholarships in the UK. We also sponsor the British Council’sPost Doctoral Research Programme which gives Saudi academics grants to conduct research in British universities.

Training and skills transferDuring 2004 we agreed phase 2 of the NationalOccupational Skill Standards and CurriculumDevelopment Project with the Saudi government.BAE Systems will provide administrative support,funding and resources to develop standardqualifications and training curriculum fortechnical trades and vocational qualifications.This builds on the success of the project’s firstphase which saw the development of 125 skillsstandards and 300 training packages matchedto workplace needs.

Alfaisal UniversityBAE Systems helped found this university in 2003,pledging funds and offering training expertise fromour joint venture company,Saudi Developmentand Training. Alfaisal University offers courses in science,engineering and technology.

United StatesGirls Understanding Engineering,Science andTechnology (GUEST)BAE Systems is partnering with the AmericanAssociation of University Women to encourageyoung women to take an interest in science andengineering. Female engineers from our site atLansdale,Pennsylvania took part in the GUESTprogramme helping local students complete anengineering and team-building project.

For Inspiration and Recognition of Science and Technology (FIRST)This international engineering contest immerseshigh school students in an engineering competitionto design a remote-control robot. In the 2004school year,175 BAE Systems volunteers spent8,969 hours working with students on their entries.

Engineering career daysMembers of BAE Systems’ Engineering LeadershipDevelopment Programme sponsored severalengineering career days. These provide groups of students and teachers with a comprehensiveoverview of careers in engineering.

Tutoring and mentoringEmployees at Information & Electronic WarfareSystems mentor elementary and middle schoolstudents through the Nashua School Districtmentoring initiative. The objective is to reverse the high dropout rate,reduce substance abuse and juvenile delinquency,and increase academicachievement in the Nashua school system. In the 2003–2004 school year 35 employees gave 1,140 hours to mentor 60 students.

AustraliaAustralia’s Engineering WeekBAE Systems is the major sponsor of SouthAustralia’s Engineering Week which encouragesand inspires young people to get involved inengineering.

Harvey Knox ScholarshipsWe support the Harvey Knox Scholarships thatgive young people the opportunity to realise theirgoals and contribute to the Hunter region in NewSouth Wales.

In 2004 we undertook research toassess the impact of our schoolpartnerships in the UK and identify ways to strengthen and improve them.

We spoke to 81 schools close to our sites,as well as key education partners such asthe Department for Education and Skills andthe Science,Engineering,ManufacturingTechnologies Alliance. These includedschools that have strong connections withBAE Systems as well as those who belongto our Schools Network but have had littledirect contact. The research showed thatthere is an opportunity for us to do more in

local schools. Around 50% had no BAE Systems activities in their schools.More positively, around 60% had heard of www.baesystems.com orwww.engineeringourfuture.co.uk and of these half had used these websites,feeling they were relevant and useful.

Half of the schools had heard of or used BAE Systems curriculum materials and ourAmbassadors had visited 40% of the schools.They spoke positively about businessparticipation and the contribution that theyhad made. Almost all said that they would like more involvement from Ambassadors.

Feedback from the survey showed theimportance of constantly marketing,andreviewing our materials and websites toensure they remain useful and providesupport to our education partnerships.

During 2005 we will develop new website materials (on a new websitewww.baesystems.com/education) and drama and workshop activities. BAE Systems Ambassadors will be closely involved. We will test these with the schools that participated in the survey to ensure they inspire and motivate the pupils.

Strengthening ourschool programmes

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20 Education and community

Community investment

We contribute to charities and good causesthrough donations of cash and materials and by encouraging our employees to give their time as volunteers.

Our support for charities and communities aroundour sites is important to our business. It improvesknowledge and awareness of our company,enables our people to gain valuable experiencesand helps create a sense of community.

In 2004 our community investment was worth £1.1 million. This includes cash and in-kinddonations (such as furniture, computers andequipment). It does not include our educationpartnerships or the value of the time given byemployees as volunteers during working hours.

We focus our support at corporate level on charitiesworking in the areas of youth programmes,medicalresearch and armed services. Some of thecharities we supported in 2004 can be found onpage 21. Our businesses and sites also makedonations to charities in their local community.

We support several charities through ourRelationship Charity Programme,giving £100,000 to each over three years. This guaranteed sumhelps the charity to plan ahead and commit to a specific project. The charities we currentlysupport in this way are: Leukaemia Research,St John Ambulance, the No Way Trust,Age Concern,and the US Juvenile DiabetesResearch Foundation.

- Our Barrow Submarines site in the UK hashelped more than 100 local charities throughCharity Challenge. In 2004 employees raised£70,000 for local charities through theKeswick to Barrow sponsored walk.

- In Australia,employees raised Aus$39,688 for the Cancer Council Australia,which will be matched by BAE Systems plc. In addition,employees also raised Aus$19,925 for anumber of other charities, including WorldVision,Leukemia Foundation,Regency Park,Cranio-Maxillo Facial Foundation,BaliOrphanages and Indian charities.

- In March 2004,70 Saudi employees took part in a BAE Systems sponsored Fun Runraising money for the Centennial Charity’sdisabled children appeal. This was the firstfundraising event of its kind organised by and for Saudi employees.

Employees vote for a new partnership charityevery 18 months. New charities to be supportedin 2005/06 are the Stroke Association in the UK,the National Heart Foundation in Australia and inNorth America, the American Cancer Society hasbeen reselected for a second term. Employeesalso support local charities and communityinitiatives through the programme.

Charity ChallengeCharity Challenge is our company-wide fundraisingand volunteering programme,operating at morethan 100 sites across BAE Systems and our jointventure partners.

It encourages employees to give their time andmoney to good causes by matching funds raisedand giving extra financial support to charitieswhere employees are volunteers. SomeBusiness Units also operate Pay As You Earnprogrammes to encourage employee giving.

Charity Challenge raised £6 million during its2003/04 campaign (July 2003–December 2004)from employee fundraising and BAE Systemsmatched donations. It reported 5,700 volunteerdays for charities worldwide. Much of the moneywas raised for four partnership charities: theAmerican Cancer Society (North America),NCH (UK), Help the Hospices (Germany) and the Cancer Council Australia (Australia).

These are just a few examples of our activities in 2004:- BAE Systems employees in the Washington,

DC area raised more than US$140,000 byparticipating in the American Cancer Society’sRelay For Life Program. Employees in the UShave given more than 15,000 hours as totalemployees in North America raised more thanUS$900,000 for the American Cancer Societyduring the 18-month campaign,breaking allprevious records.

“BAE Systems’ CR Report gives too much importance to community and employment – these are not the core issues!” Environmental non-governmental organisation

“Although the work was hard I wouldn’t have missed it for the world.In terms of my personal development I learned a great deal aboutteamwork and thinking problems through laterally.”Sattam Al-Bukhari,BAE Systems Saudi Arabia,on his experiences as a volunteer

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In October 2004 a team of 15 employeesfrom Australia,Germany,Saudi Arabiaand the UK spent four weeks living and working with charities inBangalore, India.

This initiative, organised by our jointventure in India, benefited five localcharities. Here two of the volunteersdescribe their experiences during the trip.

“Hello India! These were two words I used during my amazing four-week trip,an experience that has been life changingand one I will never forget.

I worked on two projects – installing a new kitchen for the Cheshire Home for physically disabled women and girls andthe construction of an outdoor stage atthe School for the Deaf. Both theseprojects involved hard manual labour with limited tool resources. There were no local hardware stores down the road topick up a wheelbarrow or powered gardentools. Instead we had gardening gloves,shovels, chisels,hammers and buckets to complete our projects.

I lived with a great host family of four whomade me part of their family from themoment I stepped into their home.

Their hospitality was beyond anything I could imagine.”

Tina Brock,Edinburgh ParksAustralia

“I spent most of my time working for theCentre for Learning,some 50 kilometresout of town. We lived in a small hostel,sleeping on bunk beds,washing ourclothes on stone and rubbing them with a bar of soap.

The most challenging thing about theproject was the fact that there werepractically no tools or machinery,almosteverything had to be done by hand. That included heaving large pipes thattook 6–10 people to lift and positioningthem with levers and spades.

Although the work was hard, I wouldn’thave missed it for the world. In terms ofmy personal development I learned a greatdeal about teamwork, thinking problemsthrough laterally and experiencing aculture that I will never forget.”

Sattam Al-Bukhari Riyadh,Saudi Arabia

Charity Challenge in India – two personal accounts

Amazon Hope is a floating medical centrebringing medical care and support tocommunities on the Amazon river. BAE Systems at Barrow-in-Furness ishelping to fit out and maintain the ship;and is now refitting a new sister ship –Amazon Hope 2 – to reach even morepeople. The work includes shotblasting, repainting, installing additionalfuel tanks,bunks,cabins and safetyequipment. When finished,the ship willinclude a dental surgery,minor operatingtheatre,pharmacy and accommodationfor up to 24 people.

Amazon Hope 2 – a floating medicalcentre for theAmazon

Perspectives from BAE Systems’ Charity Partners

NCH, the children’scharity

YouthChildren with Chrohns andColitisVenture TrustDowns Syndrome AssociationEngineering Development TrustOutreach Army Cadet ForceAssociationThe Country TrustWingate Special Children’s TrustWISE

Medical ResearchAsthma UKBritish Council for Prevention of BlindnessMotor Neurone DiseaseAssociationPro Cancer Research FundResearch Into AgeingSenseSpencer Dayman Meningitis UKThe Ear Foundation

Armed Services welfareCombat StressSSAFA Forces HELP

BAE Systems employeeshave given their time tohelp our projects through3,760 involvement dayssince 2002.

A huge number of projectshave benefited – from re-decoration programmes andgarden makeovers, to firesafety training for all ofNCH’s projects in NorthWales, trips to Euro Disneyfor some of the children atour projects,Christmasparties,mentoring and

befriending,and careersadvice. In monetary termsthose days translate into over£325,000 of support to NCH.

We’ve also received around£1.5 million in direct financialsupport from BAE Systems,making them one of ourlargest corporate supporters.The Charity Challengeprogramme is so wellestablished it has taught us an enormous amountabout how to make the mostof our corporate supporters.

American CancerSociety

The American CancerSociety has benefitedgreatly from being a charitypartner in BAE Systems’Charity Challenge.

BAE Systems employeeshave enthusiasticallyparticipated as volunteers in many of our events,including Relay for Life andMaking Strides AgainstBreast Cancer. In addition,the employees heldnumerous creative in-housefundraising events, raising

an outstanding US$900,000which BAE Systems willgenerously match. Theirsupport helps our mission to reduce the incidence ofcancer, increase earlydetection,save lives andsignificantly improve thequality of life of those with cancer.

The Cancer CouncilAustralia

BAE Systems has supportedus since July 2003. Theirfundraising efforts havehelped our work with cancerpatients and their families,and our awareness eventseducating people on how toreduce their risk of cancer.

We were delighted to havebeen the focus of the Charity Challengefundraising commitment.Staff at BAE Systems havebeen passionate and activesupporters involved in many

fundraising activities duringour national events andraising significant amountsof money for us.

Charities donated to in 2004

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Supply chain

22 Supply chain

Expenditure with suppliers accounts for about70% of the cost of our products and services.This means it is vital that we work with the bestsuppliers and ensure that they maintain highstandards of quality.

Our reputation can be affected by the supplierswe do business with. It is important that oursuppliers act ethically, treat their employeesfairly,maintain high health and safety standardsand manage their impact on the environment.

In return we need to treat our suppliers fairly,pay them promptly and communicate ourrequirements clearly. We believe we can get themost from our relationship with suppliers byworking with them as a team.

In this way we can improve our performance and ensure the timely delivery of high-quality,cost effective products and services to ourcustomers. We have developed a suppliermanagement programme to help us do this.

Our supply chainIn 2004 we spent £5.5 billion on goods andservices from 15,000 suppliers.

Most of this is spent with key suppliers providinghigh tech components for our products.Expenditure on major equipment,systems andsupport capability accounted for £2.7 billion and we spent £0.7 billion on smaller equipmentsuch as electronic and mechanical devices andraw materials.

We also buy a range of goods and services notrelated to our products from stationery tobusiness travel. This accounted for £0.8 billion.

We have procedures in place to ensure we paysuppliers promptly. We review and audit anyoutstanding payments to ensure they areresolved as quickly as possible.

employees who are qualified to conduct supplierassessments. We also provide training on self-assessment for suppliers to help themunderstand the requirements and identify waysto improve. Suppliers are re-assessed every twoor three years.

Our internal Supplier Development Working Groupwith representatives from each business unitmeets every six weeks to review supply-chainperformance and manage the SCE programme.

Suppliers achieving and maintaining highperformance against our excellence standardsreceive formal recognition through our bronze,silver and gold Supplychain Excellence awards.

Good communication and two-way feedback are an important element of SCE. Each supplier is assigned a senior BAE Systems manager astheir point of contact. We meet with each supplierquarterly to review progress against theirimprovement plans,get feedback and identifyways we can better support them. We also seekfeedback through regular supplier surveys.

With such a large supply chain, it is difficult for us to meet and interact with all our suppliersindividually. We work with many trade associationsand regional development agencies to providetraining and information on excellence standardsto smaller companies in our supply chain.

BAE Systems also contributes to national supply-chain improvement programmes such as SCRIA(Supply Chain Relationships in Action) and theAeGIT (Aerospace Growth and Innovation Team).Both of these have been developed by theSociety of British Aerospace Companies and theUK government to improve the competitivenessof the aerospace industry through good supply-chain relationships and better teamwork.

Supplychain Excellence All our suppliers are required to meet high-qualitystandards. In addition we have developed aSupplychain Excellence (SCE) programme tohelp us share best practice and work inpartnership with our strategic suppliers.

Through SCE we work with our key suppliers toimprove delivery,quality, cost and managementsystems and reduce waste. This benefits BAE Systems by ensuring we do our mostimportant business with high-performingsuppliers. Suppliers benefit from increasedcompetitiveness and lower internal costs.

We are working with 70 of our major suppliersthrough SCE. We aim to increase this to 80 over the next year which will account for 50% of expenditure on procurement directly related to our products.

As part of SCE,suppliers are assessed againstour Business Excellence and ManufacturingExcellence standards. These are based on theinternationally recognised business excellencemodel of the European Foundation for QualityManagement (EFQM) and Lean Manufacturing,a best practice model based on the KawasakiProduction System.

The standards cover a range of criteria, such asleadership,people management,policies andprocesses. They include questions to assessperformance on CR issues,such as ethics,employment practices,health and safety,andenvironmental management.

The assessment also identifies opportunities forimprovement. We work with suppliers to developa Continuous Improvement Plan and set targetsfor them to work towards world-class standards.

Assessments are carried out by trained BAE Systems employees. We have over 100

“The company is committed to developing long-term relationshipswith its suppliers based on mutual trust and benefit.”BAE Systems Operational Framework

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17BAE SYSTEMS Corporate Social Responsibility Report 2003 23BAE SYSTEMS Corporate Responsibility Report 2004

“Excellent organisations plan and manage external partnerships,suppliers and internal resources to support policy and strategy andCSR objectives.” European Foundation for Quality Management (EFQM) Framework for CSR

Dytecna Ltd, is a UK SME supplying BAE Systems company, C4ISR, withvehicle container installations. As a valuedpartner on the Falcon programme,Dytecnawas invited to participate in BAE Systems’Supplychain Excellence (SCE) programme.

The SCE programme is designed to benefitboth supplier and customer by checkingthat systems are in place to ensureconsistent quality,security of supply andgood EHS performance.

Working together,Dytecna was assessedby a multidisciplinary team from both

BAE Systems and Dytecna,the findingsthen being shared at workshops held atDytecna’s manufacturing site in Malvern.The initial assessment identifiedimprovements that could be made tobenefit both supplier and customer.Improvement targets were agreed between BAE Systems and Dytecna.

Dytecna has begun implementing therecommendations and the impact on cost,quality and delivery has beenimmediately apparent. The shop floor was redesigned to provide an efficient

uncluttered layout and training andcommunication mechanisms weresignificantly improved. Benefits to theenvironment include reduced waste,better materials handling and storage and increased recycling. Health and safetyhas also improved as part of the newfactory layout and investment in training.

Dytecna recognises it has embarked on along process of continuous improvementand welcomes the regular SCE reviews that are planned for the future.

Supplier partnershipimproving quality,efficiency and EHS performance

Before After

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24 Safety,health and environment

Reportable accidentsWe report all accidents defined as ‘reportable’ under theUK Reporting of Injuries,Diseases and DangerousOccurrences Regulations (RIDDOR).

2002 2003 2004

UK reportable accidents 302 325 244UK rate per 100,000 employees‡ 686 925 668

US reportable accidents 111 62 105US rate per 100,000 employees 634 258 387

Aus. reportable accidents 8 0 20Aus. rate per 100,000 employees 178 0 534

Saudi reportable accidents * 0 0Saudi rate per 100,000 employees * 0 0

Total reportable accidents 421 387 396Total rate per 100,000 employees 638 577 498‡UK Health and Safety Executive (HSE) average(manufacturing sector) 1156 per 100,000 – latestavailable date from HSE (2003)

Major accidents2002 2003 2004

UK major accidents 31 24 22UK rate per 100,000 employees‡ 70 68 60

US major accidents 6 9 4US rate per 100,000 employees 34 38 15

Aus. major accidents 0 0 2Aus. rate per 100,000 employees 0 0 53

Saudi major accidents * 8 3Saudi rate per 100,000 employees * 163 65

Total major accidents 37 41 31Total rate per 100,000 employees 56 61 39‡UK Health and Safety Executive (HSE) average(manufacturing sector) 190.6 per 100,000 – latestavailable date from HSE (2003)

We are committed to the highest standards of health and safety at work and an activeconcern for the environment. This is a specificarea for which all employees have a personalresponsibility in their day-to-day work.

We have management systems in place to reducehealth and safety risks and our environmentalimpacts. This benefits our employees and theenvironment and helps to cut our costs.

Overall responsibility for safety,health andenvironment (SHE) is assumed by our ChiefExecutive,with the Group HR Director responsiblefor SHE policy and performance. In 2004 ourManufacturing Council, of senior operationaldirectors from all Business Units,was assignedspecific responsibility for driving improvementsin SHE performance across all of our sites.

SHE performance issues are formally reviewedand starting in 2005 will be subject to formalannual review by the Board of Directors and every six months by the Executive Committee. Within our Business Units,SHE issues andperformance are reviewed regularly atmanagement committee meetings.

In 2004 we launched a new SHE framework whichdescribes management responsibilities at each levelof the organisation. This will help ensure that our SHE policy and Corporate Governance statement isimplemented effectively throughout the business.

by the UK government. This ensures the site is managed according to stringent safetyrequirements,employees are protected fromexposure to radiation,and discharges to theenvironment are within strict limits set by theEnvironment Agency. The site is inspectedthrough regular internal and external audits.

Environmental managementOur main environmental impacts are:- Consumption of raw materials- Emissions of volatile organic compounds

(VOCs) from painting and cleaning- Wastes produced at our sites- Greenhouse gas emissions from energy use- Water consumption and discharges- Contaminated land.

In 2004,our shipyard in Barrow,UK achievedcertification to ISO 14001, the internationalenvironmental management standard. This meanswe have met our target for all our major manufacturingsites to achieve ISO 14001 certification.

We use ISO 14001 to manage our environmentalimpacts and set improvement targets for eachmanufacturing site.

SHE management systemOur employees and contractors are exposed to a range of safety risks. At our manufacturingsites these include risks from manual handling,working at height,noise,hand-arm vibrationsyndrome (HAVS) and respiratory and skinirritation. Employees in office-based jobs areexposed to different types of risks includingthose from working with display-screen equipment.

We have a health and safety management system at each Business Unit to identify,manage andcontrol risks,and to ensure that employeesunderstand health and safety risks and how toreduce them. Each Business Unit has a dedicatedSHE team providing the necessary expertise andadvice. The Chief Executive signs the companySHE policy on behalf of the Board and ExecutiveCommittee. Operational responsibility andleadership for SHE performance is provided by the Managing Director and ManagementCommittee of each Business Unit.

Targets are being set for each Business Unit tomonitor and reduce the number of accidents,injuries and work-related diseases.

Additional safety processes, risk assessmentsand emergency plans are in place for our sites in the UK and US that handle explosives.

Nuclear submarines are built at our marine yardin Barrow under a nuclear site licence, issued

Safety,health and environment

Reportable diseasesWe collect data on reportable diseases,which are thoserelated to a particular activity at work and defined in law.

2002 2003 2004

UK reportable diseases1 58 158 300UK rate per 100,000 employees 132 450 822

US reportable diseases2 33 5 50US rate per 100,000 employees 189 21 185

Aus. reportable diseases3 * * *Aus. rate per 100,000 employees * * *

Saudi reportable diseases * * 17Saudi rate per 100,000 employees * * 435

Total reportable diseases 91 173 367Total rate per 100,000 employees 138 243 5171 Hand-arm vibration syndrome (HAVS) is now required to be reported at an earlier stage

2 An increased focus on ergonomics was made in 20043 The nature of operations does not require screening forreportable (defined under UK legislation) diseases.

Data : Health and safety

Explanatory notes on safety,health and environment data

We currently standardise all safety data reporting againstthe UK Reporting of Injuries,Diseases and DangerousOccurrences Regulations (RIDDOR) 1985. Theseregulations require notification of all fatal accidents,major injuries,accidents causing more than three days off work and specific dangerous occurrences at work.

In 2004,our Customer Support & Solutions (CS&S)business appointed a SHE manager to co-ordinate its SHE management and performance across all its operations(including Australia and Saudi Arabia). This has resulted in improved standardisation of approach,systems andreporting – e.g. reportable diseases and days lost due toinjury. In addition the appointment of a central co-ordinatorfor SHE issues in Australia has resulted in improvedcollation and reporting of data – hence the apparent

increase in accident and days lost rates. We consider the2004 data to be the most accurate reflection of data forAustralia and will work against these values to manageperformance. The major injuries reported in Saudi Arabiarelate to incidents on the domestic compounds for whichwe are responsible and thus include the incidents in our accident reports. The SHE management systems inCS&S were subjected to an internal audit in 2004 andimprovements are being implemented.

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Progress against UK Health and Safety Executive (HSE) Revitalising Health and Safety targetsfor reduction in workplace injuries and illness

2001 2004 HSE 2005 target BAE Systems actualBAE Systems BAE Systems for reduction reduction against

baseline actual against baseline 2001 baseline

Major accidents (rate per 100,000 employees) 68 60 5% 11%

Days lost to work-related injuries (rate per 100,000 employees) 21,079 11,299 15% 46%

Days lost to work-related illness(rate per 100,000 employees) 2,027 1,649 10% 18%

There were no work-related fatalities in 2004. Figures indicate that we are making noticeable progress against the HSE targets.


Implementing best practiceWe are working in partnership with the UK’s Health and Safety Executive (HSE) to develop a best practice approach to managing five keyissues in our UK manufacturing operations. Theseare – confined space working,hand-arm vibrationsyndrome (HAVS),working at height,contractormanagement and slips,trips & falls. We haveagreed a rolling audit programme with the HSE overa three-year period for our UK manufacturing sites.

Safety auditsSafety audits were conducted in our shipyards inScotland to review progress since the last auditin 2002. An audit of SHE management systemsand processes was also conducted throughoutour entire CS&S business.

Health and well-beingRegular health checks are provided for allemployees at risk from work-related illnesses.Employees attended 19,000 appointments tocheck for skin irritation,HAVS,respiratoryconditions,or conditions relating to noise orergonomic factors in 2004.

Many sites provide well-being initiatives tosupport employees in improving their health,reducing stress and getting fit. These includehealth screening programmes and providingmedical check-ups, treatment and advice.Individual business units organise a range ofprogrammes from confidential counsellingservices to awareness events on losing weight and giving up smoking.

Performance data We collect and report data on major andreportable accidents,work-related injuries andreportable diseases (diseases related to aparticular activity at work and defined in law).

We have agreed targets with the UK Health andSafety Executive (HSE) to reduce health andsafety incidents on 2001 levels by 2010. Interim targets were also set for 2005. We havesignificantly reduced major accidents and dayslost to work-related injuries and illness and haveexceeded our interim targets,see table below.

Safety compliance We were fined £250,000 in respect of a fatalityinvolving a contractor on our North Sea Rangeplatform in 2001.

Total injuries2002 2003 2004

UK total injuries 5,785 5,862 4,135UK rate per 100,000 employees 13,148 16,683 11,329

US total injuries 331 263 342US rate per 100,000 employees 1,891 1,096 1,262

Aus. total injuries 58 51 123Aus. rate per 100,000 employees 1,289 1,357 3,282

Saudi total injuries * 263 129Saudi rate per 100,000 employees * 5,351 2,803

Total injuries 6,174 6,403 4,769Total rate per 100,000 employees 9,355 9,550 5,999

Days lost to work-related injuries2002 2003 2004

UK total work-related injuries 6,652 6,870 4,124UK rate per 100,000 employees 15,118 19,553 11,299

US total work-related injuries 1,328 1,603 1,462US rate per 100,000 employees 7,589 6,679 3,782

Aus. total work-related injuries1 50 14 716Aus. rate per 100,000 employees 1,111 467 19,103

Saudi total work-related injuries * * 115Saudi rate per 100,000 employees * * 2,499

Total work-related injuries 8,030 8,487 6,084Total rate per 100,000 employees 12,167 12,658 7,6531 Includes new site and first full year of reporting

Days lost work-related illnesses2003 2004

UK days lost work-related illness 784.5 602UK rate per 100,000 employees 2,233 1,649

US days lost work-related illness 734 279US rate per 100,000 employees 3,058 1,030

Aus. days lost work-related illness 0 259Aus. rate per 100,000 employees 0 6,910

Saudi days lost work-related illness * 20Saudi rate per 100,000 employees * 416

Total days lost work-related illness 1,518.5 1,160Total rate per 100,000 employees 2,679 1,459

Radiation doses2002 2003 2004

Collective dose(man mSv)‡ 8.9 13.2 5.6

Average dose per person (mSv) 0.151 0.135 0.07

Number of employees engaged in radiation-related work 59 98 77‡ Millisieverts – a unit of radiation received. The average annualamount received from background radiation is 2.2mSv

Our Aerostructures site at Prestwick,Scotland,has developed an innovativeapproach to reduce health risks toemployees working with vibratingmachinery.

The approach – developed in partnershipwith other Aerostructures sites, tradeunions and occupational health teams –has two main elements. First, tools thatproduce lower vibrations are used wherepossible. In some cases the design ofcomponents or production techniquesare changed to eliminate vibration risks altogether.

Second,a study of the risk factors andthe way individual employees use toolshas enabled managers to identify vibrationrisk areas in the factory. When allocatingwork, the managers can now ensure thatthose employees who are at especiallyhigh risk from vibration (because of ahealth condition) avoid those jobs.

The initiative has been recognised by the UK Health and Safety Executive as an example of best practice.

Reducing vibration risk atAerostructures,Prestwick

Progress in 2004 – Health and Safety

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26 Safety,health and environment

EnergyBurning fossil fuels for energy use releases carbon dioxide that contributes to climate change.

We aim to use energy efficiently and areintroducing energy-saving measures at our sites.In 2004 our UK manufacturing sites and jointventure and partner companies established a Carbon Club to address compliance with the EU Emissions Trading Scheme and share bestpractice on energy reduction.

Volatile Organic Compounds (VOCs)VOCs are used in manufacturing to degrease andclean,and as a solvent in paint. They contributeto smog and can affect human health.

BAE Systems is working with Clarient to developa new enzyme cleaner to replace solvents usedin degreasing aircraft components. Trials of thenew technology are in progress at our Samlesburysite. Initial results are promising and we hope todevelop the product for widespread use withinthe next 12 months.

WasteOur sites produce both special (hazardous) andgeneral (non-hazardous) wastes. We aim toreduce the volume of waste produced andrecycle wherever possible.

have been developed and further investigationsand remediation will be carried out to mitigatethe identified potential environmental riskswhere necessary.

ComplianceThere were no environmental prosecutions in 2004.

Our Platform Solutions facility in Ontario,Californiawas fined $5,180 for operating equipment withoutCalifornia air permit applications.

There were no reportable environmental incidentsat our sites. There were 23 complaints from thepublic relating to environmental matters.

Product StewardshipWe are committed to minimising the impact of ourproducts on the environment,to ensuring that our products are safe to handle and transport,and to developing weapons systems that are asaccurate as possible. Our Product AssuranceResponse Centre helps our Business Units reducethe environmental impact of our products duringdesign,production,use and at disposal. It provides a range of information on environmental regulationsand environmentally preferable materials andprocessing technologies. Two of the projects they are currently working on are the search foralternatives to cadmium and lead used in soldering.

Waste reduction initiatives are managed by our Business Units. We also work with ourwaste management company, Cleanaway, in the UK to identify waste minimisation andrecycling opportunities.

The significant reduction in our waste output in2004 is due to the completion of a brownfieldsite redevelopment at our Land Systems site in Chorley,North West England.

Water consumption and effluent dischargeWe use most water at our ammunition productionand submarine manufacturing sites.

Contaminated landLand may be contaminated by leaks,spills orincorrect disposal of chemicals and otherhazardous materials. This is particularly seriousif contamination enters groundwater and spreadsbeyond the site.

We are inspecting all BAE Systems’ sites in the UK tocheck for contamination as part of our ContaminatedLand Strategy. During 2004 we inspected 1,027hectares of land at 10 of our major sites.

No significant instances of land contaminationwere discovered,although some potentialenvironmental risks have been identified, relatingto historical site use. In these cases action plans

IEWS,BAE Systems’ electronic warfaresystems business in the US, is introducinga range of environmental improvements.These are helping to reduce environmentalimpacts and save money.

Energy efficiency is one area beingaddressed. All eight IEWS sites haveintroduced energy efficient lighting and airconditioning systems. Some sites havealso added new roof insulation to reduceheat loss. These measures have reducedelectricity use and IEWS has received aone-time rebate of $106,000 from theirpower supplier as a result.

Recycling is also a priority at IEWS sites. A full-time Asset Recovery Team reviews all waste material to identify items thatcan be reused or recycled. Approximately135 tonnes of material were recycledduring 2004.

A new air conditioning system at the IEWS Canal Street facility in Nashua,New Hampshire has cut water consumptionby 42 million gallons a year. Previously,water used in the site’s cooling systemwas used once and then discharged intothe local river. The new system operateson a ‘closed loop’ so water is continually

reused. This saves $160,000 per year and means that no water is dischargedinto the river.

All new IEWS employees receiveenvironmental training as part of theirinduction. This ensures they understandthe company’s environmental policy andcan help to implement environmentalimprovement programmes.

Environmentalimprovements at IEWS

Progress in 2004 – Environment

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EnergyEnergy use (Gwh) Index (GWh/£1bn turnover)

2002 2003 2004 2002 2003 2004Electricity 792 657 734 98 78 54Gas 1,054 582 557 130 69 41Heating oil 64 40 49 239 5 7Total energy use 1,910 1,279 1,321 202 149 98Total CO2 emissions(million tonnes) 0.6 0.4 0.49 0.07 0.048 0.036

“Environmental management systems (EMS) allow organizations tosystematically manage their environmental and health safety matters.EMSs can result in both business and environmental benefits.” Environmental Protection Agency,USA,website

BAE Systems Regional Aircraft hasconverted a BAe 146-300 airliner,one of the quietest jets in existence,into an Atmospheric Research Aircraftto support environmental research inthe UK.

The aircraft has been equipped withhighly sophisticated atmosphericresearch instruments. It will be used bythe Facility for Airborne AtmosphericMeasurement to support research intoclimate change,prediction of extremeweather events and atmosphericchemistry and pollution.

The project is a result of a partnershipbetween BAE Systems Regional Aircraft,the Met Office, the Natural EnvironmentResearch Council and severaluniversities.

Supportingenvironmentalresearch

Data : Environment

Volatile organic compoundsOutput (tonnes) Index (tonnes/£1bn turnover)

2002 2003 2004 2002 2003 2004VOCs to air 385 341 241 44 41 18

Waste1

Output (tonnes) Index (tonnes/£bn turnover)2002 2003 2004 2002 2003 2004

Total general waste 486,985 442,283 339,650 60,300 52,734 25,198Total special waste 108,813 97,661 5,014 13,474 11,644 372Recycled 365,130 436,899 67,042 45,212 52,092 4,974

Water and effluentOutput (million m3) Index (million m3/£bn turnover)

2002 2003 2004 2002 2003 2004Total water mains 13 22 10 1.6 2.6 0.7Total water abstracted 49 49 34 6 6 3Trade effluent 2 13 2 0.25 1.5 0.15Recycled 8 1 2 1 0.11 0.15

Notes 1 The large remediationproject at Chorley inthe UK was completedin 2003,thus reducingquantities of wastegenerated and recycled

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28 Assurance

BAE Systems commissioned csrnetwork to carryout an independent review of accountabilityprocesses at BAE Systems using the AccountabilityRating®methodology1. The BAE Systems 2003CR Report was used as the basis for the review –supplemented by a limited number of seniormanagement interviews. The objective was tohighlight any strengths and weaknesses andmake recommendations for improvement to the company’s accountability practices.

Although this work responds in part to BAE Systems’ commitment to work towardsexternal verification, csrnetwork is not offeringindependent assurance.

A summary of our review findings andrecommendations are as follows. Thesecomments follow the headings used in the Accountability Rating®.

Commentary – route to assurance

Topic

Stakeholder Engagement

Governance

Strategic Intent

Recommendations from csrnetwork

Future reports should include mapping of majorstakeholder groups,more complete reporting onthe engagement processes in place, their coreissues and describe BAE Systems’ response.

In addition to the implementation activities of thenew CR Forum, the board should specificallyconsider the merits of creating a senior CRcommittee tasked with driving Group CR strategy.

There is a general need to review the corporateintent in terms of the relationship between settingGroup policy and ensuring local implementation.

Extension of Group CR policy to fully incorporaterelationships with suppliers, joint ventures,partners and investments should be considered.

The future CR strategy should address theorganisational development issues arising from theneed to achieve an appropriate balance internallybetween maintaining confidentiality and the benefitof greater transparency.

BAE Systems needs to provide evidence that CRhas been fully embedded into all levels of thebusiness and should review the business case for aligning with voluntary standards.

BAE Systems’ response

The 2004 report has addressed stakeholderengagement with further information provided on stakeholder groups and an explanation ofengagement processes. We intend to carry out a stakeholder mapping exercise during 2005.

The 2004 report provides feedback from a widerange of stakeholders on those issues that matter to them as well as giving our response.

The 2004 report features a detailed section on the Supplychain Excellence programme.

The external CR website has been updated toimprove transparency across all CR issues.

The Board has agreed to establish a BoardCommittee on CR. This will be implemented in 2005 and progress reported.

The newly established CR Forum will be reviewingthe relationship between group policy and localimplementation and forming an action plan to driveCR initiatives locally.

The 2004 report includes information on ourrelationship with our suppliers. We are investigatingif and how this might be extended to influence jointventures,partners and other investments where we hold a controlling share.

The 2004 report has more information andtransparency on key stakeholder issues includingethics,business conduct and supply chain.

We intend to revise our Operational Frameworkduring 2005 to explicitly embed our CR principleswithin our Code of Practice.

Observations

BAE Systems undertakes a range of activities thatcontribute to its understanding of stakeholderissues and expectations. However, theseprocesses are not yet systematic.

Some challenging views were acknowledged in the 2003 CSR Report that help to identify somestakeholder issues.

The 2003 report did not fully recognise positivedevelopments such as the Supplychain ExcellenceProgramme.

The Virtual University provides a mechanism foreffective dissemination of information on CSR issues.

BAE Systems has recently taken significant stepsto improve its governance arrangements by addingcorporate responsibility explicitly onto the boardagenda and assigning specific board responsibilityfor CR.

Several non-financial policies already exist,e.g.safety,health and environment,ethics,arms export,employment and diversity.

Although training on non-financial issues is not yetin place for board members, it has been recognisedas something that may be necessary in the future.

Some non-financial impacts are described in the 2003 report, particularly economic andenvironmental impacts.

Some explicit links have been made between corebusiness strategy/objectives and CR issues,butoverall the strategic intent with respect to CRremains unclear.

Notes 1 The Accountability Rating 2004®was developed as a joint projectbetween csrnetwork and AccountAbility. For more details seewww.csrnetwork.com/accountabilityrating

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“BAE Systems has recently taken significant steps to improve itsgovernance arrangements by adding Corporate Responsibilityexplicitly onto the Board agenda…”

Topic

Performance Management

Assurance

Public Disclosure

Observations

BAE Systems has the systems and management in place to manage most relevant CR impacts.

Significant training programmes are in place forsenior managers on several areas includingcorruption,bribery and equal opportunities.

BAE Systems has a strong anti-bribery awarenessprogramme in place (including an independent hot-line) that helps monitor compliance with companypolicy. This is a core component of the company’sgovernance system which is not fully recognised inthe CR Report.

BAE Systems is committed to assurance over publicdisclosures; csrnetwork are in discussion with thecompany regarding development of both internaland external assurance processes,howeverachieving progress will take time.

BAE Systems is included in several externalbenchmarking studies e.g. the Business in theCommunity Corporate Responsibility Index and islisted on the Dow Jones Sustainability Index (DJSI).

Compliance information has been disclosed forsafety,health and environment,but not for otherareas such as human resources.

BAE Systems has acknowledged stakeholder viewson corporate responsibility issues in the defencesector by commissioning specific articles fromexternal observers. The company now needs todecide how it can better describe its ownperformance in relation to the issues raised.

Recommendations from csrnetwork

Within this review we have not determined the extentto which CR management systems are inter-connected between local and group level.

The process for setting and monitoring objectives/targets should be clarified and made increasinglyquantitative in the different areas of CR.

There would be merit in assessing existing incentiveand appraisal programmes to ensure support forachievement of non-financial policies and targets

There are some uncertainties regarding the integrityof data collection at operating unit level. Differentunits may use different methods.

An early priority is to work with Internal Audit todevelop internal assurance processes that addresscompliance with policy and data processes at alocal level. This is an essential precursor foreffective external assurance.

Disclosing more details of improvement issueshighlighted by benchmarking studies wouldincrease the transparency of reporting.

Reviewing the alignment and compatibility ofhuman resources data collection systems so as toallow more complete reporting on other complianceareas such as discrimination and unlawful dismissal.

Regulations requiring UK companies to produce an Operating and Financial Review (OFR) will comeinto effect in 2005. It will be important to ensureconsistent mechanisms are used for determiningmaterial issues for public disclosure in both theOFR and CR report.

Use of the Global Reporting Initiative Guidelineswill facilitate selection of appropriate indicators for material and other relevant issues; allowingconsistency/comparability with peers.

BAE Systems should include commentary relatingto alleged improprieties on specific transactions,thus providing more complete reporting.

BAE Systems’ response

In 2004 we set up a CR Forum to improve the links between group and local levels.

We set and monitor our safety, health andenvironment objectives and targets and executivemanagement provides strong leadership. We areinvestigating how we can improve reporting in thisarea to increase transparency

Behavioural Performance is already a key part of our incentive and appraisal programmes forsenior managers.

We are continually reviewing our data collectiontools to ensure consistency and integrity of data.

One of our 2005 objectives is to improve our rating against Accountability standard AA1000. We plan to work with our internal audit team early in 2005 to put in place the mechanisms necessary to achieve this.

In the 2004 report we have featured more detailedfeedback from the DJSI including those areas where improvements can be made. We intend to meet with Sustainable Asset ManagementResearch early in 2005 to formulate an action plan to address these areas.

We are continually reviewing our data collectiontools to improve reporting.

Increased stakeholder engagement and the newBoard Committee on CR will better allow us todetermine the material issues for public disclosure.

We continue to review all external benchmarks toassist us in selecting the appropriate indicators forour reporting.

BAE Systems is working to increase transparency in our reporting and we will continue to improve inthis area.

Mark Line Director Lucy Candlin Associate csrnetwork Ltd UK, January 2005

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30 CR on the web

CorporateResponsibilityReport on the web

www.baesystems.com/corporateresponsibility

Find out more …

This report summarises our corporate responsibility performance in 2004.More detailed information on our policies and programmes,and further casestudies,are available on our website:

CR 2004_SN v19 4/3/05 4:03 pm Page *30

We welcome feedback,both positive andnegative,on any aspect of our corporateresponsibility performance and reporting.Email us at [email protected].

We’ve had our say –now tell us what you think.

CreditsConsultancy by Context.

Designed and produced by OPX,London.

Printed with vegetable-based inks usingpaper with a 75% recycled content.

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BAE SYSTEMS plc6 Carlton GardensLondonSW1Y 5ADTelephone +44 (0)1252 373232Fax +44 (0)1252 383000www.baesystems.com

For more information contact:Dr Deborah AllenDirector of Corporate ResponsibilityTelephone +44 (0)1252 383469Email [email protected] [email protected]

Leigh Ann TomkinsCorporate Responsibility ManagerTelephone +44 (0)1252 385168Email [email protected] [email protected]

01.05.CRR2004.001

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