Lord Woolf's Report on BAE: A Practical Review

Wolf Von Kumberg

In the July issue of the AFN newsletter, Nick Burkill presented a review of Lord Woolf's report in relation to BAE Systems. There are some practical implications arising from the report; what lessons can companies other than BAE take away from it?

The points made by Lord Woolf are well-considered and thoroughly address the ethical compliance issues he found lacking within the BAE environment. Clearly, over a period of time, ethical issues had arisen at BAE that needed to be corrected. The report provides recommendations to address both those issues and others to ensure ongoing compliance in the future.

BAE is not alone in its failings. There are many global companies that still do not have a compliance programme or, if they have one, they are extremely lax in its application. Integrity Interactive, in its 2008 European Corporate Integrity Survey, found that 64% of respondents had a formal code of ethics. Of the remainder, 3% had no formal code at all, 24% had nearly completed a code, and the rest felt that they were well on their way to completion.

The issue, according to Integrity Interactive, was not so much the fact that a handful of respondents had no formal code, but that the vast number of respondents who had a code had made so little progress in supporting it. Few respondents had implemented formal training programmes, monitored the ethics programmes, or measured how effective their programmes are. This finding by Integrity Interactive is reflected in the weaknesses that Lord Woolf found to exist at BAE. In other words, BAE is simply an example of the ethical state of affairs present within many European companies. In fact, recent headlines in relation to European companies such as Siemens, EADS, Elf and UCAR, to name a few, support this view.

Key Ingredients

What practical advice can we as companies take away from Lord Woolf's report? He has outlined a number of key ingredients of a robust compliance programme that can be summarised as follows:

• The Board should set out to be a global leader in ethical business.
• BAE should become an advocate of its ethics, adopted openness and transparency.
• BAE should develop a code of ethical business conduct.
• The Board should establish a Corporate Responsibility Committee to oversee ethical standards.
• BAE should put in place a formal process to consider ethical risks that would result from business decisions.
• Advisors assisting with offset defence contracts should be subject to the same due diligence and approval process as those advisors engaged in relation to principal export contracts.
• BAE should continue to forbid facilitation payments as a matter of global policy whilst trying to eliminate them completely over time.
• BAE should require joint ventures and contractors to adopt ethical codes and polices that are similar to those undertaken by BAE.
• Access to BAE's ethics helpline should be extended to joint ventures and contractors.
• BAE should ensure that an assessment is made of proposed lobbying positions and campaigns against BAE's ethical standards.
• BAE should have a proactive approach to initiating internal investigations.
• Any proposal to appoint a third party to provide services to BAE's security division should be subject to the same process as the appointment of advisors and there should be regular reports on the activities of the security division.
• A well-resourced ethics training programme should be established for all staff.

Continuing Compliance

In addition, Lord Woolf has made a number of key recommendations to ensure continued compliance:

• The BAE internal audit function should undertake to assess ethical standards and reputational risk.
• Senior management's ethical standards should be reflected in their pay.
• There should be a senior executive who reports to the CEO and Chair of the Corporate Responsibility Committee on the ethical standards programme.
• There should be a regular review of policies and procedures and areas with potential ethical risk.
• BAE should undertake a mandatory selection and management process for advisors.
• There should be maintained a central register of expenditure on gifts and hospitality.
• BAE should take a more proactive leadership role in engagement with the defence industry and governments.
• BAE should be open and transparent in communicating all of its activities.
• An independent external audit should be commissioned within three years and at regular intervals thereafter.

One of the greatest weaknesses of any compliance programme is the assumption that simply publishing it is enough to ensure it will be adhered to. Many companies have put in place a good programme that looks good on paper but there is no follow-through. Such programmes are often worse than no programme at all.

Prosecutors will look at a company's compliance record when prosecuting ethical violations. Having put a compliance programme in place, but then not following up, reflects, as far as a prosecutor is concerned, either an intent to deceive or at least a callous disregard for the consequences. In addition, the reputational harm done where there is clearly an attempt by management to avoid its own internal policy as well as the law, can only be the greater and the consequences harsher.

Practical Advice for Any Company

What we can draw from Lord Woolf's Report are the following key elements that should be adopted by any company seeking a robust compliance programme:

• Develop a formal code of conduct based on the best industry examples.
• Identify the key ethics and compliance risks in your company and industry.
• Formulate the necessary policies to address the identified risks.
• Establish a Corporate Responsibility Committee to oversee ethical standards.
• A senior executive should report to the CEO on ethical issues and chair the Corporate Responsibility Committee.
• Implement the necessary training and internal communication programmes to ensure that policies are implemented.
• Systematically monitor your company ethics and compliance programme.
• Measure the effectiveness of your ethics and compliance programme.

A further lesson we can take away from Lord Woolf's report is that implementation of an effective compliance programme needs management support and continuous monitoring at the highest level. Management must lead by example and be committed to enforcing the programme in all of its own actions and decisions; their ethical standards should be reflected in their pay. Employees must understand that, by adhering to the programme, they personally benefit through positive reviews, pay increases and promotion, while infractions will lead to disciplinary action and dismissal.

Time will tell to what degree these recommendations will be implemented by BAE. The fact that they have been made so publicly, and by an independent committee chaired by a legal figure prominent in the United Kingdom, will probably ensure that they are adopted to a large extent. The broader message is, however relevant to all companies, shareholders, the public and governments to see. We are going through a sea change in our perception of corporate ethical issues. Companies will ignore these signs and Lord Woolf's recommendations at their peril.

Wolf von Kumberg is European Legal Director and Assistant General Counsel at Northrop Grumman Corporation. He has had over 20 years experience as an international counsel and is also a Fellow of the Chartered Institute of Arbitrators as well as a practising Mediator. Northrop Grumman Corporation is a leading Aerospace Defence company with worldwide operations and a turnover of $32 billion. Contact Details: Tel: + 44 (0) 207 747 1911 Email: wolf.vonkumberg@euro.ngc.com