Questions from the 2009 AGM held at the Barbican, London on Wednesday, July 15 2009.

At the 2009 AGM Chairman Sir Michael Rake and his fellow Board members answered questions from shareholders on a wide range of issues including:

BT Global Services

Shareholders asked several questions about the underperformance of BT Global Services and what actions had been taken to address the issues. BT Global Services operates in more than 170 countries serving major companies and government organisations.

Sir Michael and Ian Livingston explained that the performance of this division during the financial year had been unacceptable and that the Board had acted promptly by changing not only the chief executive of the division, but also the senior management team. The new team has taken immediate action to address the cost base, to improve the profitability of new contract wins and to improve the delivery performance on existing contracts. The Board is confident that measures are now in place which will drive a transformation in the performance of the business, building on BT Global Services’ strong market position. It is an organisation recognised as a global leader in Gartner’s magazine ‘Quadrant for Network Service Providers’ and industry analyst, Telemark Services.

Customer service

In response to questions raised regarding the efforts BT is making to improve its customer service in areas such as broadband availability, directory enquires and dealing with customer complaints, Ian stated that customer service is one of BT’s key performance indicators against which BT measures its success. He confirmed that BT has made significant progress in this area with complaints falling by 40% and a more than 30% reduction in line faults, but also recognised that there is still much to be done.

Share price performance and dividend policy

Several shareholders were disappointed with the share price performance and the reduction in the dividend. Sir Michael responded by saying that the share price has fallen largely as a result of the unacceptable performance of BT Global Services, together with the turbulent financial markets during the last year. The total dividend of 6.5p rebases dividend payments to a level which the Board is confident is sustainable for the business going forward. The Board is committed to delivering attractive returns for shareholders. Operational improvements in the business should generate sufficient cash flow to allow the dividend to grow at the same time as we invest in the business, reduce debt and support the pension scheme.

Pension scheme

The Chairman was asked to comment on the additional payments being made to the BT Pension Scheme. He explained that BT has agreed with the Trustee of the Scheme and the Pensions Regulator that BT will make deficit payments equivalent to £525 million a year for the next three years. He stated that this is a fair deal for BT’s shareholders and pensioners and demonstrates that the company stands fully behind its pension obligations.

Executive directors’ remuneration

Some shareholders expressed their concern regarding the termination payment paid to François Barrault, previously Chief Executive of BT Global Services, in light of the division’s poor performance. Sir Michael recognised that this payment has caused some consternation and confirmed that he understood these concerns. He explained that François had been employed under a Belgian contract and that he was entitled to the payments made. The company was disappointed at having to make this payment, but was required to do so by law. It is also worth noting that he had been entitled to shares worth some £1.5million which lapsed when he left the company.

Several shareholders raised questions regarding executive directors’ remuneration. Sir Michael and the Chairman of the Remuneration Committee, Maarten van den Bergh, stated that the policy was for executive remuneration to be closely linked to the long term performance of the company. For this reason BT is one of the few companies that has set executive base pay below the median for comparable firms, with a substantial proportion of total remuneration linked to performance targets. For annual bonuses the majority of BT’s performance targets are financially based, but there are also targets for customer service and for each director’s contribution to BT’s environmental, social and governance objectives. This policy complies with industry best practice. This year BT missed its financial targets, although some bonuses were paid out because of progress in the non-financial targets. Overall, executive bonuses were 70% lower than a year ago and bonuses were delivered in shares not cash. There have been no pay increases this year.

BT has also led the way by introducing a claw back provision into executive share plans so that unvested shares can be taken back if the Remuneration Committee subsequently decides there was a misjudgement of the basis on which the award of shares was made.

In response to a question regarding the retention award made to Tony Chanmugam, Sir Michael clarified that he had been granted this retention award prior to his appointment to the Board. No retention awards have been granted to current Board members.

Non-executive directors’ fees

Some concern was raised over the provision in the new articles of association that the fees of the non-executive directors would be increased to £65,000 per annum. The Company Secretary, Andrew Parker, explained that this represented a new limit for non-executive directors’ fees to give flexibility going forwards. No increase in the current non-executive directors’ annual fees of £60,000 was planned for the near future - their fees had last been reviewed in January 2008.

Board experience

There were a few questions requesting assurance that the non-executive directors were able to devote enough time and attention to BT in light of their other commitments. In addition, confirmation was requested that the skills and experience of the Board as a whole were appropriate for a company the size and complexity of BT. Sir Michael explained that the directors go through a rigorous selection process and bring with them a wealth of experience; whether that’s expertise within the telecoms sector, specialist knowledge in areas such as finance, or a track record on business in Britain and internationally. Sir Michael explained that it is a balance to ensure that the non-executive directors bring their knowledge and expertise without spending too much time at BT to the extent that it compromises their independence.

Notice of general meetings

Referring to the resolution that the company may call a meeting (but not an AGM) on 14 clear days’ notice, one shareholder asked for confirmation that BT would be giving adequate notice for shareholders to attend these meetings.

Sir Michael and the Company Secretary explained that the resolution was being proposed because of the EU Shareholder Rights Directive, to take effect in August 2009 in the UK, would otherwise mean that the company would have to give 21 days’ notice of general meetings. The 14 day notice period is the same as currently provided and means that the company can act quickly to call a meeting in the event that it needs to. It doesn’t affect the AGM.