12 Nov 2008
'Business ethics, global companies and the defence industry'
It is a great pleasure for me to have the chance to speak here at the American European Business Association.
Over the next fifteen minutes or so I want to give you my perspective on, and share some experiences on a subject I feel very strongly about.
I will talk about three things:
1. How business ethics is shaping the world in which multinationals operate.
2. The challenges and responsibilities facing the defence industry around business ethics.
3. How we are trying to create a leadership position for BAE Systems through our approach to business ethics.
About myself
A bit on my experience:
- I had a transatlantic education at both US and UK universities.
- I had an executive career with BP for 31 years. I spent seven years in the US both in the 1980s and 1990s and where we transformed BP from 1992 to 2000 into a global super-major.
- I am Chairman of BAE Systems - a global defence company with a significant footprint in both the US and Europe.
- I am a Non-Executive Board Member of Reuters and now Thomson-Reuters where the company does business according to the Reuters Trust Principles.
My current number one priority is addressing the reputation and governance of BAE Systems and driving a leadership position for BAE Systems in the defence industry around our approach to business ethics.
At BP, during the period from 1992 to 2000, we transformed the company into a global super-major and one of the world's top ten companies. This required building a performance culture but our belief and our experience, aided by being a big company, was that reputation is everything and that ethical behaviour created a competitive advantage through reputation.
So, ethical business matters and for a variety of reasons.
Firstly - There is a strong business case
Business ethics are at the heart of building a strong performance culture in organisations. What a company values and the way it performs its business dealings around the globe are fundamental to business success. Responsibility in business ethics builds trust, reputation and transparency with all its stakeholders.
Multinationals such as Unilever, Tata and Satyam have built their businesses on a strong foundation of ethics and have demonstrated the value that brings to their employees, shareholders and to the communities in which they operate.
There is growing evidence from organisations such as the Institute of Business Ethics that companies that have codes of conduct do better overall than those that don't. As codes of conduct have become the norm, further research has revealed that embedding those ethics codes through training and communication is what provides the enhanced financial performance linkage.
This does not surprise me and anecdotal and personal experience bears this out.
Secondly - I fundamentally believe it is the right thing to do
All companies - and big companies especially - are now subject to a level of scrutiny and expectation that would have been thought remarkable a generation ago. I don't mind that - indeed I welcome it. It is important for companies to hold themselves accountable for the way in which they conduct their business dealings and their responsibilities to the communities in which they serve.
Companies have woken or are waking up to the fact that the way they handle business ethics is essential for good business; not only for their corporate reputation but also it will have a positive impact with customers, employees and in the communities in which they operate. So I believe it creates competitive advantage.
Thirdly - Corporate Reputation is paramount
Reputation is about trust and confidence - not only that the company is complying with the law, but that the company is doing the right thing in the eyes of its stakeholders. Without this trust, it is impossible to sustain the business.
Reputation is hard earned and quickly lost! The hard work of many individuals over many years can be undone by the few, acting unwisely on a few occasions.
Finally - good business ethics practice gives multinationals a licence to operate
Global public perceptions of what is right and wrong in business culture have significantly evolved and a global company must keep pace with this. Today companies are expected to have a position on issues that weren't considered to be within the business remit years ago, such as; climate change, labour practices of suppliers in faraway countries and diversity of employees. They are also expected to engage in philanthropic activities and to invest in their communities and the communities in which they have a business impact.
Many multinationals are involved in developing countries, and therefore in carrying out nation-building activities. The sheer scale of these multinationals as compared, in some cases, to the nations in which they operate, means that they can wield influence. And having that power places great responsibility on what the company does.
Thankfully the world has changing expectations, there is far less tolerance today to leaders who do not act ethically. The world expects improved performance and their expectations get more acute over time. Embracing business ethics gives companies a licence to operate.
So what are the challenges facing industry in fully embracing business ethics?
Anyone involved in implementing an ethics compliance programme will understand the enormity of the challenge. Whether it is a company hit by scandal or not, the ethics philosophy needs to run deep into an organisations psyche to be truly successful.
Multinationals share the challenge of applying ethical standards across a range of cultures and countries in which they operate. Saudi Arabia may be different from Switzerland! So the method of implementation may be different but the core set of beliefs are unchanged. Honesty, truth or disclosing personal interests that might prejudice behaviour are all the same.
Communication is key and we have to work harder to communicate our ethical approach in the face of suspicion. For companies, like BAE Systems, this is about being on the front foot, being a leader, ensuring that people understand when we will do business and when we won't, what our values are around the principles of business ethics and how we demonstrate being responsible through our business transactions in all the countries where we operate.
Taking a leadership position
There are some great examples of industry working together to take collective action.
The pharmaceutical industry is one example. One particular case in 2000 involving a Japanese/American pharma joint venture in the US accused of conspiring with doctors to overcharge government insurers, led to a staggering fine of $875m. This galvanised the industry and the big pharma firms came up with a collective solution, promoting self policing via local and global industry associations. These groups have since developed voluntary ethics codes and run peer review committees to investigate allegations of misconduct.
There are similar initiatives in the defence industry, and I believe we can do much more.
The UK Government is leading attempts to develop an International Arms Trade Treaty. This inter-governmental initiative is being led in the UK by the Foreign Office and BAE Systems and the defence industry are lending their support.
BAE Systems itself has been active in a number of industry ethical initiatives including being a founder and active member of the Aerospace and Defence Industries Association of Europe's industry task force. BAE Systems pressed for (and funded) the preparation of a set of Common Industry Standards, which were approved by the ASD Council in April 2007 and opened for adoption by European Trade Associations in September 2007. Sixteen countries initially signed up and this number has now grown to more than 20.
In the US BAE Systems has been a signatory to the Defense Industry Initiative on Ethics and Business Conduct (DII) since 2002. The DII is a voluntary self-governance organisation of over 80 defence industry companies founded in 1986 and recognised by the U.S. Department of Defense.
BAE Systems is also supportive of an ongoing dialogue between the ASD Council and Aerospace Industries Association in the US which are aimed at reaching agreement on industry standards that will be applicable across the Atlantic. Once the discussions have been formalised there is hope that the next stage will include an international conference to be held at the time of the Paris Air Show in 2009.
An example of action which BAE Systems has taken which industry could learn from is the process developed for the selection, appointment and management of advisers. The Woolf Committee's assessment of this process was that it exceeded all of the elements required to adequately minimise potential ethical and reputational risks associated with these third parties. In order to implement this process the contracts of all existing advisers were either terminated, with proposals for reappointment to go through the process in the UK, or subject to review in the US using the same process.
BAE Systems now has a uniform global contract for the appointment and oversight of external advisers, the terms of which meet and usually exceed the standards laid down in the applicable laws and regulations of the markets in which BAE Systems conducts its business.
So how else are we striving to create a leadership position at BAE Systems through our approach to business ethics?
The Company is determined that it should be recognised as a leader in responsible business worldwide and we continue to strive for ways to improve our business and its reputation.
We are reputationally challenged and you will be aware that our reputation has been dominated by the ongoing SFO and DoJ investigations.
We continue to co-operate with both the SFO and DoJ investigations and wholeheartedly support a rigorous approach, in the hope that it brings the enquiries to a conclusion quickly, in the UK these are now in their 5th year.
That is why we asked Lord Woolf, a former Chief Justice, with an exceptional reputation for integrity, thoroughness and objectivity, to lead a committee of experts to produce a facts-based, independent account of the Company's ethical business conduct.
Appointing Lord Woolf to undertake this review was a bold move, yet we went one step further and gave a commitment to act on all the Committee's recommendations before even seeing the report.
The report itself was published in May this year, it contained twenty three recommendations and provides the 'benchmark' upon which BAE Systems can confidently build for the future.
The report identified work which is already in progress and areas for improvement. Since May we have made good progress by putting in place a comprehensive three-year implementation programme with a dedicated resource drawn from across our business.
One of the things that makes me very proud of BAE Systems and its people is that we did not put the Woolf Report on the shelf marked 'Action Sometime'. We took it, read it, and decided that we would implement it, down to every last comma and full stop. But the outputs of the implementation programme will not be dealt with in isolation; in order for us to successfully deliver this programme the outputs must quickly become part of how the company conducts its day to day business.
It is all part of a global peformance culture - ethics, safety and financial performance
Of course this will take time. And here I am reporting to you on work in progress. We are building something big, but any engineer will tell you (and I speak as one) the most important parts of anything big are often below ground and invisible.
Let me share some of the progress we have made.
At the beginning of next year we are introducing a global code to support our global strategy. The code provides guidance on the principles, standards and personal behaviour that our people should bring to their business conduct.
We have the wholehearted commitment of our senior management to make this work, and to ensure that every member of BAE Systems shares that commitment. The code represents a starting point for us but it must be accompanied by an environment of leadership by example. We are determined to promote a collective and individual sense of responsibility to ensure this code isn't just a document to be filed away, but that it becomes the core tenet for how business gets done at BAE Systems and underpins sustainable commercial success.
Another key recommendation of the report was to appoint a senior Corporate Responsibility executive, reporting directly to the CEO, to ensure that the Company's plans to meet the highest standards of business conduct are met and we have done just that.
We have also appointed Deloitte to provide external assurance on an annual basis as to the progress of the implementation programme and this will be reported through our Corporate Responsibility Report which is due to be published in April 2009.
Our global strategy has been successful because of our aspiration to be world-class in our total performance. BAE Systems has many business imperatives but we will not succeed with them unless we manage our culture with the same rigour and pursuit of continuous improvement that we do our financial and project management skills. This is no easy task and to achieve this we have to create an inclusive culture where the great diversity of talent and capability of our 100,000 employees is harnessed.
As our business continues to evolve we will build on our employees' pride and integrity by equipping them with the capability, accountability and confidence that ensures high ethical standards in all that we do.
