SCEPTICS DOUBT BAE SURVIVAL STRATEGY
By Rebecca Bream, Caroline Daniel and Clay Harris
Financial Times

06 Jan 04. The FT reported that Paolo Scaroni, the BAE Systems non-executive director who has decided not to stand for re-election, may be the most public internal sceptic about the defence company’s strategy, including its single-minded pursuit of a US merger, but he is not alone in having qualms. While the board has apparently spent most of its time looking at US merger options, with Boeing the leading contender, Mr Scaroni wanted BAE also to formulate a plan for survival as an independent company.

A BAE representative claimed yesterday that dissent was a thing of the past. He said that any splits were healed when Sir Robin Biggam and Keith Brown, former non-executive directors, left at the 2003 annual meeting, indicating that they shared Mr Scaroni’s views. But Mr Brown, chairman of the Racecourse Association, said his reason for stepping down was purely to retire after 14 years. Sir Robin could not be reached for comment. Another person with inside knowledge of BAE indicated, however, that Mr Scaroni was not the only dissident left on the board.

The perception that BAE has its heart set on a US merger, leaving it little time left as an independent company, has also hindered the search for a successor to Sir Richard Evans, who is due to retire as executive chairman no later than April. Sir Richard is believed to be willing to extend his tenure if necessary, but his flexibility is measured in months and is not open-ended. BAE has had a tempestuous few years. Its perceived role as national champion after the 1999 takeover of the defence interests of General Electric Company (now Marconi) alienated potential European partners such as Eads without giving it an especially warm welcome in Whitehall.

Its relations with the Ministry of Defence have been icy, with money wrangles over a succession of troubled contracts at the root of the friction.
The remark, a year ago, by Geoff Hoon, defence secretary, that he did not consider BAE a British company, because more than half its shares were held outside the UK, came amid a tough battle with Thales, the French defence group, over a contract to build two aircraft carriers for the Royal Navy. The company’s injured patriotism rang a bit hollow considering it had changed its name from British Aerospace to avoid being pigeon-holed as “British”. BAE appeared to salvage partial victory from expected defeat when it was chosen to lead a joint exercise with Thales, but the project was still in disarray last month.
Mr Scaroni’s criticisms of strategy stretch back almost to when he joined the board in 2000, say sources close to the chief executive of the Italian utility Enel.

He felt that BAE’s problem, of letting defence projects frequently run over budget and past deadline, could be cured by hiring a chief executive with sound engineering and project management experience, to inject some discipline.

Mr Scaroni was unhappy when Mike Turner, the chief operating officer, whose background is in marketing, was promoted, following the ousting of John Weston, former chief executive, in March 2002. But Mr Scaroni’s dissatisfaction has increased since BAE’s profit warning at the start of 2003. It had already written off £300m because of troubles with the Nimrod aircraft contract. Mr Scaroni has been arguing his case, according to sources close to him, particularly on the issue of whether to pursue a US merger. No common ground was found. Mr Scaroni’s allies insist that his management style is normally consensual, but that he sees no point in staying on a board that will not take his views into account.

Sir Peter Mason, chief executive of the construction services group Amec, succeeded Sir Robin as BAE’s senior independent director. Along with other non-executive directors, including Lord Hesketh, Conservative Party treasurer, and Michael Portillo, former defence secretary, he co