Strategy & Operations » Governance » Why BAE cried Woolf

A review into business practices at defence business
has called for tougher anti-bribery measures at the
company. But many of the recommendations of the committee are equally pertinent
to any company with operations outside the UK.

The study by
, former Lord Chief Justice of England and Wales, sets out 23
recommendations for the company and a “route map” for BAE to ensure it becomes a
leader in ethical standards. He also noted that BAE took the unprecedented step
of committing to implementing all of his recommendations even before the review
got under way. Moreover, the report was published in full at the same time that
it was presented to the company board.

The Woolf review was established in June 2007 in the wake of accusations that
BAE made multi-million pound payments to help win a deal from Saudi Arabia ­
though all parties deny any wrongdoing.

The report says the company should publish a global code of ethical business
and strengthen its anti-bribery measures in the appointment, management and
payment of certain advisers. The document also proposed measures to strengthen
board oversight of ethical issues through the corporate responsibility

The High Court ruled recently that it was unlawful for the Serious Fraud
Office (SFO) to have ended an investigation into BAE’s al-Yamamah deal with
Saudi Arabia. The £43bn deal was signed in the 1980s, but continued into the
1990s. It involved BAE selling Tornado and Hawk jets, as well as other weapons,
and included long-running maintenance and training contracts. The SFO said the
probe would have undermined national security. It has been given permission to
appeal against the court ruling. BAE has maintained that it acted lawfully.

Lord Woolf said BAE had accepted it had no alternative “but to continue along
the route of taking all practicable steps to ensure that the circumstances that
gave rise to allegations of past misconduct do not reoccur in the future.”

Board ethics
The first six of Lord Woolf’s recommendations focus on the role of the board and
the company’s ethical conduct. The report argues that a company’s ethical policy
should be communicated from the board down and that ethical conduct should be a
standing item on the board’s agenda.

Furthermore, it says “the board should ensure that the global code of ethical
business conduct is comprehensive and reflects the high standards of ethical
business conduct consistent with the aspiration and intention to become a leader
among global companies.”

Lord Woolf recommends that the board’s corporate responsibility committee
and internal audit function should ensure these standards of ethical behaviour
are properly communicated and embedded throughout the organisation.

Recommendations 7, 8 and 9 talk about the role of senior executives and
decision-making within the company. They state that “members of the senior
executive team and heads of business units have a personal and collective
responsibility to demonstrate high standards of ethical business conduct.” This
should be reflected in their performance appraisals and remuneration.

Reporting payments
Lord Woolf is also in favour of nominating senior executives to take
responsibility for the company’s ethics programme. He proposes that there should
be a senior executive who reports directly to the CEO and head of the corporate
responsibility committee who is in charge of leading the ethics programme.

Most of the criticisms made against BAE Systems have concerned allegations
about the use of locally-based “advisers” to help secure contracts,
particularly through the use of bribes.

While the company has taken action in terminating or reviewing existing
contracts that it held with such advisers, Lord Woolf says there should be “a
requirement to undertake face-to-face interviews, involving a company lawyer, a
s part of the due diligence process with all advisers whose activities require
the interaction with potential customers.”

He suggests that “facilitation” payments should be forbidden as “a matter of
global policy”. However, “while it may not be possible to eliminate such
payments immediately in some countries, management and employees in those
countries need to be supported to ensure all such payments are reported to
senior executives and the board, and the means developed to eliminate them
completely over time.”

The report makes clear that there needs to be an effective internal
investigation and disciplinary procedure in place to enforce the company’s
ethical conduct and that there should be an “employee ethics line” so that
equivalent standards are in place for joint ventures with key contractors.

One of the best ways to communicate the company’s commitment to ethical
behaviour and global standards is to implement a thorough training programme for
employees, including senior executives and business unit leaders. Systems for
monitoring the effectiveness of these programmes should also be set up.

The last two recommendations push for the company to be “as open and
transparent as possible in communicating all its activities” and that “where
this is not possible, the company should explain the reasons why”. He also says
the board or corporate responsibility committee should commission and publish an
independent external audit of ethical business conduct and the management of
reputational risk “within three years and at regular intervals thereafter.”