Report of the directors
The directors have pleasure in presenting their report together with the audited accounts for the year ended 31 December 2006.
Profit and dividends
The profit attributable to the ordinary shareholders of the company for the year ended 31 December 2006 amounted to £6,202 million compared with £5,392 million for the year ended 31 December 2005, as set out in the consolidated income statement on page 139.
An interim dividend of 24.2p per ordinary share was paid on 6 October 2006 totalling £771 million (2005 – £619 million). The directors now recommend that, subject to approval at the Annual General Meeting, a final dividend of 66.4p per ordinary share totalling £2,093 million (2005 – £1,699 million) be paid on 8 June 2007 to members on the register at the close of business on 9 March 2007.
Business review
Activities
The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland, the principal direct operating subsidiary undertaking of the company. The “Group” comprises the company and all its subsidiary and associated undertakings, including The Royal Bank of Scotland and NatWest. Details of the principal subsidiary undertakings of the company are shown in Note 15 on the accounts.
The Group is engaged principally in providing a wide range of banking, insurance and other financial services. Further details of the organisational structure and business overview of the Group, including the products and services provided by each of its divisions and the competitive markets in which they operate, is contained on pages 46 and 47 of the Operating and financial review.
Risk factors
The Group’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Details of the principal risk factors the Group faces are given on page 48 of the Operating and financial review.
The reported results of the Group are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of the Group’s critical accounting policies and key sources of accounting judgements are included in the Accounting policies on pages 136 to 138.
The Group’s approach to risk management, including its financial risk management objectives and policies and information on the Group’s exposure to price, credit, liquidity and cash flow risk is discussed in Note 34 on the accounts.
Financial performance
A review of the Group’s performance during the year ended 31 December 2006, including details of each division, and the Group’s financial position as at that date is contained in the Operating and financial review on pages 49 to 78.
Business developments
The Group led a consortium which acquired a 10% stake in Bank of China for US$3.1 billion in 2005. The Group itself invested US$1.6 billion. Bank of China listed on the Hong Kong Stock Exchange in June 2006 and on the Shanghai Stock Exchange in July 2006, issuing new shares equivalent to 14.14% of its enlarged share capital and raising US$13.7 billion. The Group did not take up its rights in the listings and the consortiums’ shareholding in Bank of China is now 8.25%.
In the year since the RBS investment was completed in December 2005, good progress has been made in developing the partnership. The joint credit card business has already issued more than one million cards and both sides have agreed to expand its scope to include all credit cards and merchant acquiring in mainland China. Preparations have been made to open pilot offices for the joint private banking business in Beijing and Shanghai early in 2007. Co-operation in corporate banking led to the completion of over £1 billion of transactions in shipping, aviation and trade finance. RBS has provided advice in a number of key operational areas including risk management, IT and human resources.
Employees
As at 31 December 2006, the Group employed 135,000 employees (full-time equivalent basis) throughout the world. Details of employee related costs are included in Note 2 on the accounts on page 143.
Employee recruitment
Across the Group, over 20,000 employees are recruited at different levels every year. The Group utilises a wide range of recruitment channels including executive search, general advertising, an open internal jobs market, talent fora and detailed succession planning to ensure that the recruitment and development of its employees are fully aligned to its organisational requirements.
Employee reward
The Group’s continuing success is closely linked to the performance, skills and individual commitment of its employees. In order to attract, motivate and retain the best available talent at every level, the Group offers a comprehensive remuneration and benefits package, Total Reward, to all employees.
Within this package, RBSelect, the Group’s benefit choice programme, provides for UK staff in the Group a flexible way of tailoring their reward to reflect their own individual lifestyles. During 2006, the Group brought retirement savings provision within RBSelect in order to provide more choice for the receipt of retirement benefits. Employees can also participate in bonus incentive plans specific to their business and share in the Group’s ongoing success through profit sharing, Buy As You Earn and Sharesave schemes, which align their interests with those of shareholders.
Employee learning and development
The Group maintains a strong commitment to creating and providing learning opportunities for all its employees through a variety of personal development and training programmes and learning networks. The Group’s employees are encouraged to volunteer to work with its community partners. The Group continues to invest in leadership and management development which is consistent with its objective of being the employer of choice: attracting, rewarding and retaining the very best talent.
Many of the Group’s development programmes are delivered at the RBS Business School, based on the Gogarburn Campus.
Employee communication
Employee engagement is encouraged through a variety of means including the corporate intranet, Group and divisional magazines, team meetings led by line managers, briefings held by senior managers and regular dialogue with employees and employee representatives. The Group Chief Executive and other senior Group executives regularly communicate with employees through ‘Question Time’ style programmes, broadcast on the Group’s internal television network.
Employee consultation
The Group’s confidential global employee opinion survey is externally designed, undertaken and analysed annually on behalf of the Group by International Survey Research (ISR). The survey enables employees to maximise their contribution to the Group by expressing their views and opinions on a range of key issues.
A record-breaking 87% of Group employees in over 30 countries completed the 2006 survey. For the second year in a row, the Group scored significantly above the ISR Global Financial Services Norm in all categories. The survey results are presented to the Board and at divisional and team levels. Action plans are developed to address any issues identified.
The Group recognises trade unions in the UK and Ireland. These formal relationships are complemented by works council arrangements in many of the Group’s mainland Europe-based operations. The Group has a European Employee Communication Council that provides elected employee representatives with an opportunity to better understand the impact on its European operations.
Diversity
The Group’s Managing Diversity policy sets a framework for broadening the Group’s talent base, achieving the highest levels of performance, and enabling all employees to reach their full potential irrespective of age, disability, gender, marital status, political opinion, race, religious belief or sexual orientation.
The Group is also committed to ensuring that all prospective applicants for employment are treated fairly and equitably throughout the recruitment process. Its comprehensive resourcing standards cover the attraction and retention of individuals with disabilities. Reasonable adjustments are provided to support applicants in the recruitment process where these are required. The Group provides reasonable workplace adjustments for new entrants into the Group and for existing employees who become disabled during their employment.
Health, safety, wellbeing and security
The health, safety, wellbeing and security of employees and customers continues to be a priority for the Group. Regular reviews are undertaken of both policies and processes to ensure compliance with current legislation and best practice. The Group focus is on ensuring that these policies are closely linked to the operational needs of the business.
In the first quarter of 2006 the Group launched a Wellbeing website which includes a health and wellbeing calendar. The site is designed to raise awareness of international health issues and events, and to provide lifestyle education, information and support to employees.
Services were extended under HelpDirect, the Group’s Employee Assistance Programme, to provide support to all employees in the event of a critical incident. The service provides telephone access to qualified clinicians and a global network of counselling affiliates to enable the Group to provide a consistent level of support to individuals and the business wherever they are located.
Code of ethics
The Group has adopted a code of ethics that is applicable to all of the Group’s employees and a copy is available upon request.
Corporate responsibility
Business excellence requires that the Group meets changing customer, shareholder, investor, employee and supplier expectations. The Group believes that meeting high standards of environmental, social and ethical responsibility is key to the way it does business.
For the financial services sector, consumer banking issues are the primary focus, followed by financial inclusion and capability, financial crime and corruption, employee practices, the challenge of climate change, support for small businesses and community giving. The Group takes all these responsibilities seriously, continually monitoring and managing them through policies and practices across the Group. The Board regularly considers corporate responsibility issues and receives a formal report on these twice each year.
Further details of the Group’s corporate responsibility policies will be contained in the 2006 Corporate Responsibility Report.
Going concern
The directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the ‘going concern’ basis for preparing the accounts.
Corporate governance
The company is committed to high standards of corporate governance. Details are given on pages 108 to 113.
Ordinary share capital
During the year ended 31 December 2006, the company purchased for cancellation 54.4 million of its ordinary shares at a total cost of £1 billion. These repurchases represented 1.7% of the issued ordinary share capital of the company at 31 December 2006.
During the year, the ordinary share capital was increased by 7.5 million ordinary shares allotted as a result of the exercise of options under the company’s executive and sharesave schemes, 0.3 million ordinary shares allotted in respect of the exercise of options under the NatWest executive scheme which had been exchanged for options over the company’s ordinary shares following the acquisition of NatWest in 2000 and 2.2 million ordinary shares allotted under the company’s employee share ownership plan.
Details of the authorised and issued ordinary share capital at 31 December 2006 are shown in Note 30 on the accounts.
Preference share capital
Details of issues and redemptions of preference shares during the year and the authorised and issued preference share capital at 31 December 2006 are shown in Note 30 on the accounts.
Authority to repurchase shares
At the Annual General Meeting in 2006, shareholders renewed the authority for the company to make market purchases of up to 319,778,520 ordinary shares. As at 28 February 2007 (the latest practical date prior to printing of this report) the company had an unexpired authority to repurchase further shares up to a maximum of 265,384,899 ordinary shares of 25p. Shareholders will be asked to renew this authority at the Annual General Meeting in April 2007.
Bonus issue
Shareholders will be asked to vote at the Annual General Meeting on a proposal for the capitalisation of part of the company’s share premium account, resulting in the issue of up to 6.4 billion new ordinary shares of 25p each, details of which are set out in the letter to shareholders.
Directors
The names and brief biographical details of the directors are shown on pages 102 and 103. All directors, except:
- Fred Watt, who resigned from the Board on 31 January 2006,
- Guy Whittaker, who was appointed to the Board on 1 February 2006,
- Johnny Cameron, Mark Fisher and Bill Friedrich, who were appointed to the Board on 1 March 2006, and
- Sir George Mathewson, who retired from the Board on 28 April 2006,
served throughout the year and to the date of signing of the financial statements.
Lawrence Fish, Sir Fred Goodwin, Archie Hunter, Bud Koch, Joe MacHale and Gordon Pell will retire and offer themselves for re-election at the company’s Annual General Meeting.
Details of the service agreements for Lawrence Fish, Sir Fred Goodwin and Gordon Pell are set out on pages 117 and 118. No other director seeking election or re-election has a service agreement.
Directors’ interests
The interests of the directors in the shares of the company at 31 December 2006 are shown on page 125. None of the directors held an interest in the loan capital of the company or in the shares and loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2006 to 28 February 2007.
Directors' indemnities
In terms of section 309C of the Companies Act 1985 (as amended), the directors of the company, members of the Group Executive Management Committee and Approved Persons of the Group (under the Financial Services and Markets Act 2000) have been granted Qualifying Third Party Indemnity Provisions by the company.
Directors' disclosure to auditors:
Each of the directors at the date of approval of this report confirms that:
- so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
- the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 234ZA of the Companies Act 1985.
Shareholdings
As at 28 February 2007, the company had been notified of the following interests in its shares.
| Number of shares | % held | Number of shares | % held | ||
| Ordinary shares: | 51⁄2% cumulative preference shares: | ||||
| Legal & General Group plc | 127,207,908 | 4.01 | Commercial Union Assurance plc | 91,429 | 22.86 |
| Barclays PLC | 126,836,868 | 4.01 | Mr P. S. and Mrs J. Allen | 86,999 | 21.75 |
| The Capital Group of Companies, Inc | 95,578,555 | 3.01 | Bassett-Patrick Securities Limited* |
46,255 | 11.56 |
| 11% cumulative preference shares: | E M Behrens Charitable Trust | 20,000 | 5.00 | ||
| Guardian Royal Exchange Assurance plc |
129,830 | 25.97 | Mrs Gina Wild | 19,800 | 4.95 |
| Windsor Life Assurance Company Limited |
51,510 | 10.30 | Trustees of The Stephen Cockburn Limited Pension Scheme | 19,879 | 4.97 |
| Mr S. J. and Mrs J. A. Cockburn | 30,810 | 6.16 | Miss Elizabeth Hill | 16,124 | 4.03 |
| Cleaning Tokens Limited | 25,500 | 5.10 | Mr W. T. Hardison Jr. | 13,532 | 3.38 |
| Ms C. L. Allen | 13,200 | 3.30 | |||
| Ms J. C. Allen | 12,750 | 3.18 |
* Notification has been received on behalf of Mr A. W. R. Medlock and Mrs H. M. Medlock that they each have an interest in the holding of 51⁄2% cumulative preference shares registered in the name of Bassett-Patrick Securities Limited noted above and that there are further holdings of 5,300 and 5,000 shares, respectively, of that class registered in each of their names.
Charitable contributions
In 2006 the contribution to the Group’s Community Investment programmes increased to £58.6 million (2005 – £56.2 million). The total amount given for charitable purposes by the company and its subsidiary undertakings during the year ended 31 December 2006 was £25.4 million (2005 – £24.3 million).
Political donations
At the Annual General Meeting in 2006, shareholders gave authority for the company to make political donations and incur political expenditure up to a maximum aggregate sum of £500,000 as a precautionary measure in light of the wide definitions in The Political Parties, Elections and Referendums Act 2000, for a period of four years. These authorities have not been used.
No political donations were made during the year and it is not proposed that the Group’s longstanding policy of not making contributions to any political party be changed.
Policy and practice on payment of creditors
The Group is committed to maintaining a sound commercial relationship with its suppliers. Consequently, it is the Group’s policy to negotiate and agree terms and conditions with its suppliers, which includes the giving of an undertaking to pay suppliers within 30 days of receipt of a correctly prepared invoice submitted in accordance with the terms of the contract or such other payment period as may be agreed.
At 31 December 2006, the Group’s trade creditors represented 28 days (2005 – 27 days) of amounts invoiced by suppliers. The company does not have any trade creditors.
Auditors
The auditors, Deloitte & Touche LLP, have indicated their willingness to continue in office. A resolution to re-appoint Deloitte & Touche LLP as the company’s auditor will be proposed at the forthcoming Annual General Meeting.
By order of the Board.
Miller McLean
Secretary
28 February 2007
The Royal Bank of Scotland Group plc is registered in Scotland No. 45551.
© 2007