The Anti-Fraud Network

Lord Woolf's Report on BAE

Nick Burkill

Shortly after the BAE judgment (see the AFN Newsletter, June 2008), Lord Woolf published his report into BAE. Lord Woolf and his committee had been commissioned by the company to report to the board

Identifying the high ethical standards to which a global company should adhere.
Identifying the extent to which BAE already meets those standards.
Recommending action by BAE to achieve the standards.

Clearly BAE has struggled in recent years to move forward from the allegations made against it and that were the subject of the investigation by the UK Serious Fraud Office (SFO) and investigatory authorities in other jurisdictions. The Woolf report identified that allegations have been made in the media regarding the business conduct of BAE in some 10 jurisdictions throughout the world. These do not include the United States, where investigations are ongoing. The report makes the point that, for all global companies, the protection of their reputation is of great importance:

“[BAE] is not alone in having to focus on these issues. In recent years Boards and senior management of a number of significant global companies have been distracted by the need to deal with allegations of ethical malpractice. Restoration of a company’s reputation, when it is seen to be seriously tarnished, can be a complex and lengthy process involving significant distraction of senior management and often litigation. If reputational issues are not promptly addressed they are likely to fester. This can impact on the development and future profitability of a company. Among other damaging consequences, may be a decline in employee morale and difficulties in recruiting high quality personnel.”

There are many global corporations that would agree from their own experience. The fact that they do not need to be named emphasises what a long process it is for corporations to recover their reputations.

It is also interesting that the report identifies BAE’s reputational damage as not simply flowing from the allegations made against it:

“Whether and to what extent any of these allegations are justified, the fact is that many of the external interested parties with whom the Committee spoke still perceive the Company to have been overly secretive, defensive, unwilling to explain its actions and at best lukewarm to the challenge of dealing with the major reputational issues affecting the Company and industry.”

The report itself is a fascinating review of the dangers facing companies in this area and contains 23 recommendations for action, all of which are of relevance to global corporations. They are listed at the end of this review and also contained in the executive summary prepared by the Committee, which can be viewed here: http://217.69.43.26/woolf/Woolf_exec_summary_2008.pdf.

The length of the process that BAE faces is emphasised by the investigation in the United States. In mid-May, the Chief Executive and a non-executive director of BAE were detained as they each entered the United States and their personal electronic equipment examined as part of the Department of Justice’s investigation into BAE. One questions whether there was a realistic expectation that these officers’ computers were really going to contain relevant evidence, so the exercise seems to have been more a statement of intent or statement of dissatisfaction with progress in the US investigations than one of evidence gathering. The Woolf report is obviously not the end of the story, but provides positive guidance both for BAE and other corporations facing up to the challenge of dealing with corruption.

Lord Woolf’s Recommendations

Aspiration of the Company
1. The Board of Directors should decide and communicate the Company’s strategic aspiration and intention to be a leader in standards of ethical business conduct among global companies.

Openness and transparency
2. The Company should be an advocate of its own ethical standards and must adopt the principle of openness and transparency. All ethical business conduct policies and procedures must be publicly available and easily accessible. The Company should be open about the actions it has undertaken to investigate allegations of unethical behaviour and about the outcomes.

A global code of ethical business conduct
3. The Company should develop, publish and implement a global code of ethical business conduct. The Board should ensure the proposed global code is comprehensive and reflects the high standards of ethical business conduct consistent with the aspiration and intention to become a leader among global companies.

Role of the Board of directors
4. The Board should develop its increasingly proactive role in ensuring high standards of ethical business conduct in all the Company’s activities. It should be a standing item on its agenda. There should be an explicit assessment of ethical and reputational risks in all business decisions taken by the Board. Board members should themselves be exemplars of the standards set out in the global code and receive regular briefings on emerging issues in business ethics.

Role of the Corporate Responsibility Committee (CRC)
5. The Board Corporate Responsibility Committee (CRC) should have primary responsibility for oversight and reporting on standards of ethical business conduct and the management of reputational risk. This role should be performed as the Audit Committee performs its task of managing financial risk.

6. The Company’s Internal Audit function should ensure that ethical business conduct and the management of reputational risk is specifically assessed in all audit reports and the results, and progress made against recommendations, provided to the CRC. The additional skills and resources required for Internal Audit should be provided to achieve this. The CR and Audit Committees should hold at least one joint meeting a year to decide on the preparation of the annual internal audit programme.

The role of senior executives
7. Members of the senior executive team and heads of business units have both a personal and collective responsibility to demonstrate high standards of ethical business conduct and to achieve effective implementation of the global code. Both should be reflected in their performance appraisals and in the variable element of their remuneration.

8. There should be a senior executive, supported by a sufficiently resourced team, reporting to the CEO and with direct access to the Chair of the CRC, who has responsibility for the programme to ensure and assure there are high standards of ethical business conduct across the Company.

Decision making within the Company
9. The Company should develop formal processes to ensure business decisions are only taken following an explicit consideration of ethical and reputational risks. Where such risks are identified, the process should ensure any decision to proceed is taken at the appropriate level, and should include ratification by the Board.

Review of key ethical policies and procedures
10. Policies and procedures in areas of potential ethical risks should be regularly reviewed, with particular attention to the areas of greatest risks. The planned programme of reviews by the Company should ensure a consolidated and comprehensive suite of policies consistent with the global code, providing employees with a clear pathway to understanding how the Company’s standards of ethical conduct can be applied in day-to-day business situations.

Selection, appointment and management of advisers
11. The Company should ensure that the new process for selection, appointment and management of advisers is fully codified and integrated into the mandatory policy and procedures of the operational framework, and that appropriate guidance and training in the process is provided to all relevant employees. This should make explicit:

a requirement to undertake face-to-face interviews, involving a company lawyer, as part of the due diligence process with all advisers whose activities require the interaction with potential customers;
a general presumption that the identity of such advisers will be made known to potential customers; and
endorsement by the Board of the adviser panel’s recommendations and their explicit approval of any decision to make an appointment contrary to the panel’s advice.

Offset policy
12. Advisers engaged to assist in Offset arrangements in export contracts should be subjected to the same due diligence and approval process as Advisers on the principal export contract. Offset contracts should be subject to a due diligence process requiring an explicit assessment of ethical and reputational risks and be capable of being audited for this. The Company should also be proactive in encouraging greater scrutiny and transparency by governments of the Offset elements of defence contracts.

Facilitation payments
13. The Company should continue to forbid facilitation payments as a matter of global policy. 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 to the Board, and the means developed to eliminate them completely over time.

Gifts, hospitality and donations
14. The Company should implement central registers (by individual country) to enable information to be collected and monitored on aggregate spend on gifts and hospitality to individuals and overall to each customer. Aggregate spend by individual country on gifts and hospitality should be reported annually to the CRC. The policy on gifts and hospitality should be circulated to customers, contractors and suppliers and the Company should agree and document acceptable standards and expectations of behaviour with each customer government. A global policy on corporate donations should be developed, consistent with the global code and the policy of openness and transparency.

Acquisitions, joint ventures and contractors
15. The Company should:

for all new majority joint ventures require the adoption of its global code and associated policies and procedures, or equivalent standards;
for all new minority joint ventures, mergers and acquisitions, undertake a due diligence assessment of standards of ethical business conduct compared to those of the Company, and ensure to the extent possible that equivalent standards are put in place;
for all new key contractors, require the adoption of its global code and associated policies and procedures, or equivalent standards in all of its collaborative activities; and
for all existing relationships, implement a programme to achieve the above.

Employee ethics line
16. As part of the programme to ensure that equivalent standards are in place for joint ventures and with key contractors, the Company should extend to them appropriate access to its ethics helpline.

Government relations and lobbying
17. The Company should ensure an explicit assessment of proposed lobbying positions or campaigns against the values and standards in the global code, and that regular reports on this are submitted to the CRC.

Investigation and disciplinary procedures
18. The Company should make explicit its commitment to take a proactive approach to instigating internal investigations into allegations of unethical behaviour and to the disclosure of any material findings to the relevant authorities. Aggregate information on disciplinary actions for unethical behaviour should be included in internal and external publications.

Security division
19. Any proposals for the appointment of third parties to provide the Company’s Security Division with information should be subject to the same process (including Panel review) as for advisers. Regular reports on the activities of the Security Division, and compliance with ethical policies and procedures, should be provided to the CRC.

Training
20. A well-resourced training programme, in which every person in the Company participates, should be undertaken as part of the implementation of the global code and revised and repeated at regular intervals. Specific training modules should also be developed for senior executives and business unit leaders. Systems for monitoring these programmes should be developed so that they are able to provide the necessary assurance to the CRC as to their effectiveness.

Leadership in collective action by the defence industry
21. The Company should take a more proactive leadership role in its engagement with the defence industry, governments, NGOs and other external interest parties to develop initiatives that will address the key ethical and reputational issues affecting the defence industry.

External communication
22. The Company should be as open and transparent as possible in communicating all of its activities. Where this is not possible the Company should explain the reasons why.

Assurance and reporting
23. The Board/CR Committee should commission and publish an independent external audit of ethical business conduct and the management of reputational risk in the Company within three years and at regular intervals thereafter.

Nick Burkill is co-head of Dorsey & Whitney's London trial group and has broad experience of domestic and international disputes, with particular experience of the investigation of fraud and corruption and the recovery of the proceeds of fraud. Nick is a frequent speaker and commentator on a broad range of issues. He is a member of the Civil Procedure Rule Committee, the committee responsible for the making of rules of court subject to the Lord Chancellor and led by the Master of the Rolls, the Head of Civil Justice.

Contact Details:
Tel: +44 (0)207 826 4583
Email: burkill.nick@dorsey.com